This chart is more than just a colourful pattern bouncing across your computer screen. It tracks house prices and household spending; the pivotal relationship that dominates the UK economy.
As the chart above amply illustrates, it is extraordinary how closely these variables move together. These indicators are the economic equivalent of synchronised swimming. When real house prices increase, spending follows. When house prices fall, spending dives down with it. Consumption spending accounts for about 70 percent of GDP, which in turn determines employment and income growth. Therefore, it's not hard to see why policymakers are obsessed with maintaining high and growing house prices.
It is, however, an unhealthy relationship. The recent period of sustained housing inflation enticed people into thinking that they were becoming wealthier. When they should have been saving, they began spending and borrowing. Through home equity loans or credit cards, the housing market was a great facilitator, which encouraged people to the sticky swamp of personal indebtedness.
Like a lot of nasty, compulsive relationships, it is difficult to see a way out. Nevertheless, there are a couple of steps that will allow our consumption spending patterns to break loose of our obsession with housing. We need to liberalise planning regulations, introduced a tax on land, and regulate the real estate and financial sectors industry more effectively.
The Bank of England should also explicitly target house price inflation. Like regular inflation, rising house prices occur when central banks reduce interest rates and commercial banks extend too much credit.
All these measures are perfectly reasonable and feasible, which will significantly reduce the probability of future housing bubbles. All that is needed is the political will to carry them out.