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/> 2. A “credit constraints' channel: house price growth increases the collateral available to home- owners, thus loosening borrowing constraints and facilitating higher consumption

3. A “common causality' model: factors such as changes in expected income growth, tax changes or changes in credit market conditions lead to increases in both households' expenditure and house prices (see King (1990) and Pagano (1990)).

It is said that “Aggregate consumption may become more responsive to house prices as older homeowners become an increasing fraction of the population.”

Another explanation of the relation of housing prices to consumption can be given: A house is a collateral property which can be used as collateral to borrow money. This creates a money supply for the owner of realty properties and converts notional money/wealth into actual wealth.

The high tax rates during 1970s as a part of government policy led to a decline in housing prices. The decade was marked by high inflation rate and high unemployment. The liberalisation policy followed by the Margaret Thatcher government in the late 70's and early 80's caused a boom in the housing sector. This was partly funded by the increase in government spending to the tune of 58%. The new government discouraged all the trade unions and their policies were to tackle inflation and budget deficit. All these changes made an effect on market and increased housing prices reduced inflation.

If we observe changes in housing price and household consumption of UK we can observe there is positive co-relation between them. According to Bank of England's Monetary Policy Committee member Nickell, “The evidence suggests that house price inflation is significantly related to household consumption growth and hence to aggregate demand growth and future consumer price inflation in the economy'. However the degree of co-relation is reduced by other factors which affect consumption like employment and consumption habit of the individuals.

There was a negative change in price and household consumption during early 1990s. This was due to high interest rates, rising unemployment and deep recession which led to a fall in demand of all type of housing consumption and caused decrease in prices. The decrease in interest rate post 1996 reduced prices largely because now people could borrow more and repayment was also reduced.

The latest crises in the housing sector were caused due to the mortgage crises that engulfed most of the western countries particularly the highly integrated economies of OECD. The primary reasons behind the crisis were shortage of finance, shortage of mortgage, cost push inflation, etc squeezing incomes and reducing disposable income and the collapse in confidence in finance sector. Due to all these reasons borrowing was difficult and less money was available to spend.
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