In a market with a sufficiently large share of such deep-pocketed arbitrageurs, it can be argued that the development of house prices relative to incomes can be largely accounted for by the substantial decline and then flattening out of the real risk-free interest rate over this period. Miles and Monro (2019) apply such a framework to demonstrate this. However – as I will go on to describe – this relationship does not fully explain house price moves over shorter time periods, which may be affected by credit conditions. 6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  decisions (as housing is also an asset). In this literature, expectations of future income, future interest rates, and future house prices and can all play a role. There is some evidence that current interest rates and current house price growth have an important influence on expectations (Charts 4 and 5). All of these factors were likely at play during the pre-Covid decade. Chart 4: Momentum in annual asset price growth 1.0  Regression coefficient on lagged asset price inflation using annual data  0.8 0.65 0.6 0.33  0.4 0.2 0.0 House prices  FTSE all share  Sample uses annual data from 1971-2020 for house prices, from 1977-2020 for FTSE allshare.
These simplifying assumptions mean that the analysis and resulting figures should be taken in context. 9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  Chart 6: Mortgage debt: income  Chart 7: Price and non-price credit conditions 8 Percentage  140 Counterfactual  Actual  pp spread to OIS  Cumulated net percentage balances  -600  6  -400  4  -200  2  0  120 100 80 60 40  0 2007  20 0 70  75  80  85  90  95  00  05  10  15  200 2010 2013 2016 2019 2y75% mortgage spread (lhs) 2y90% mortgage spread (lhs) Availability of secured credit (CCS, rhs) Credit scoring criteria Maximum LTV  20  The blue line represents estimated demand for mortgages and the resulting impact on aggregate mortgage debt, under the assumption that there is no shortage of mortgages. Demand for mortgages is estimated based on factors including household wealth and incomes, the housing stock and the elements that contribute to the user cost of housing (including interest rates, maintenance and depreciation costs, property taxes, and expected capital gains). It is estimated for the period 1984-2007 when most borrowers were not credit-constrained. This forward demand equation is then projected forward based on realised values for incomes, house prices and the stock, assuming there are no constraints on credit availability or access to mortgages.