In very broad terms, each household which owns or is buying its own property has, on average, ‘positive equity’ worth about £160,000.

For those with mortgages, the figure is £120,000 and for the 43% of owner occupiers without mortgages, positive equity represents 100% of the value of their property, in other words around £190,000.

The £120,000 represents a figure that is about four times the national average wage but although it is hard to convert this ‘wealth’ into cash, there are two macro economic effects that cause concern to policymakers.

The first and most obvious effect of positive equity is that as households feel their ‘wealth’ growing, they are less inclined to save.

As Chart 14.3 below shows, over the long-term, UK consumers have on average saved, or not spent, a sum equivalent to around 8% of income. During the years of robust growth before the current recession, this ratio dropped below 6%, the most sustained period of low saving since the series began in 1964.

What is also very clear is that the propensity to save in the last 20 years has fallen fastest at times when house prices have been rising fastest. (Comparisons with earlier periods are less relevant because of lower levels of home ownership and lower real incomes which made saving less likely.)

There are other factors contributing to a falling saving ratio (such as high levels of confidence about job prospects, fewer fears of redundancy and lower interest rates which offer poorer nominal returns on savings) but housing is central to the argument.

A rise in consumer confidence, the so-called ‘feel good factor’ will encourage consumers to spend and borrow rather than save.

A second way house prices underpinned the rapid growth of consumer spending was by the mechanism of ‘equity release’.

Often of a longer-term nature than credit card borrowing or overdrafts, homeowners unlocked some of the equity built up in their property to support consumption.

Repayments were frequently linked to the existing mortgage and the value to the homeowner of pursuing this course depended on the future trend of house prices and interest rates.

Many financial institutions make this type of facility readily available and in the late 1980s, it added another 8% of potential spending to an already overheated consumer sector. During the latest surge in house prices, equity release climbed to new highs.

Over the last two years, over £100 billion was estimated to have been borrowed by households against the value of their property, with borrowing, at its peak, back to over 8% of disposable income.

Other forms of consumer credit, at £43 billion, amounted to less than half equity withdrawal.

When interest rates are raised, disposable incomes are reduced and spending directly cut as mortgages follow Bank Rate upwards.

At the same time, the rise in house prices is likely to slow, or be choked off altogether if rates go high enough, halting or even reversing the wealth effect. (The doubling of base rates in a 15 month period in 1988-89 led to house prices falling.)

Today, however, there is a major policy dilemma. The authorities (the MPC) responded to the energy induced jump in consumer price inflation by raising interest rates. From August 2006 to May 2007, interest rates rose from 4.5% to 5.75%. The slow response of activity to the tightening of policy led to expectations of even higher rates.

Slowing consumer activity by raising rates is the traditional mechanism, and it was especially effective at a time when personal debt was at a record level. It has since risen even further, to £1.5 trillion, equivalent to 160% of annual earnings.

With a total of 2.26 million new mortgages in 2006, it was clear that the consumer market would be very sensitive to the recent rate changes.

The impact of recent interest rate changes was delayed partly because, of the 2.26 million new mortgages, just 49,300, or 2%, were at standard variable rates. The rest were fixed or had some form of protection. This clearly insulated 98% of last year’s mortgagees from those rate increases.

But those whose fixed rate deals unwound found very sharp increases in their repayments. In 2003, for example, there were over one million fixed rate mortgages at an average rate of 4.23%.

As bank rate headed towards 6%, the extra debt servicing charges took a sizeable bite out of disposable incomes. Rather than a managed soft landing, the consumer sector faced a sharp shock.