And house prices and consumer confidence do seem to be closely correlated. So house prices may be a leading indicator of sentiment about the economy and hence of consumption and domestic demand. But, just like equities, house prices also reflect changes in real interest rates. Since long-term real interest rates have fallen from over 3½% to below 3% over the past year, it is not surprising that house, and other asset, prices have risen. Precisely because housing is an asset, its price is more volatile than most goods and services in the retail price index. As such, it is important to look at house price levels as well as at their rates of change. Although house prices have been rising quite rapidly over the past couple of years, they returned to the peak reached in the late 1980s only at the end of last year, and exceeded it for the first time in the first quarter of this year. That, of course, followed the sharp fall in house prices in the early 1990s - house prices fell by over 10% between 1990 and the end of 1992. For most families, apart from future earnings and pensions, their wealth is dominated by one asset and one liability. The asset is their home and the liability is the mortgage on it. But the difference between these two is sensitive to the state of the economy. In a low inflation world, house prices are likely to rise and fall whereas the mortgage liability is fixed in money terms.
So members of the Committee vote on interest rates according to the economic data, which change from month to month, and the analysis of those data. No one takes a position that higher interest rates are a good or a bad thing out of principle. If you drove past an infant school at 40mph, you might well be described as driving dangerously fast. But if you drove at 40mph on a motorway, you might well be described as driving dangerously slowly. Actions must be judged in the light of the circumstances. In terms of monetary policy, that means that the positions which members of the MPC take on interest rates will change over time according to the way the economy evolves. But if interest rates themselves cannot be predicted, because they depend on changing economic data, what should be predictable is the way MPC members respond to those data. A predictable “policy reaction function”, to use the jargon, should, over time, diminish the interest which market commentators take in the meetings of the MPC and direct that interest to what is happening in the economy. So, as the voting record shows, it is seriously misleading to think of the MPC in terms of fixed camps of “hawks” and “doves”. As circumstances change, it is easy to imagine that the “hawks” shall be “doves” and the “doves” shall be “hawks”.