This is the second in a two-part issue of the ECFIN Country Focus looking at household consumption in the UK. Given the strong house price inflation of recent years, and historical links between house prices and consumption in the UK, this Country Focus asks if there are likely to be significant negative wealth effects from a period of falling house price growth – particularly given the UK’s painful experience in the early 1990s, when a house price crash coincided with a deep recession?

This note finds some evidence that historic links between house price growth and consumption appear weak in the current cycle, suggesting that the risks to the wider economy from a fall in house prices are lower than might have been expected. Some structural factors have been at work – but coincident developments in other variables may have helped offset, and potentially disguise, some wealth effects.

Equally, wider real economy developments should help to support consumption going forward, even if house price growth slows, or reverses. Risks remain, particularly in the exposure of some lower-income groups – but together with the finding in the previous note that the current debt burden seems largely manageable, the risks to the wider economy appear smaller than often assumed.