I say so for a simple reason - the ratio of consumer spending to house prices has for a long time been a good predictor of changes in house prices (adjusted for inflation) in the subsequent three years. Since 1966, the correlation between the two has been 0.51. A low ratio of spending to house prices in 1972-73, 1979, 1989 and 2007 led to house prices falling in the following three years. A high ratio in 1976, the early 80s, and mid 90s led to house price booms in the following three years.
Although the spending-house price ratio has risen a little since hitting an all-time low in 2007, it is still low by historic standards. This points to prices rising very little. If the post-1966 relationship continues to hold, the Nationwide index of house prices will rise 3.7 per cent in real terms in the next three years - implying nominal inflation of less than 4 per cent a year. And it tells us that there's a high risk of prices falling - a roughly one-in-four chance of them dropping 10 per cent in real terms by 2015.
One reason why the spending-house price ratio predicts house price inflation is simple mean-reversion. A low ratio is often a sign that house prices are high, which means they are about to fall. And as the National Housing Federation has reminded us, housing is still very expensive, even though Nationwide figures show that the average price has fallen 11 per cent since its 2007 peak.
But there's another reason. It lies in the wisdom of crowds. If home-owners anticipate bad times, they'll rein in their spending even if rising house prices would permit them to borrow and spend a lot. The spending-house price ratio will then be low. Of course, any individual consumer is likely to have all sorts of silly ideas about the future. But averaged (or medianed) across millions of individuals, such errors should often cancel out. Insofar as they do, the spending-house price ratio will be a good predictor of future economic conditions, with a low ratio leading to bad times and a high one to good.
For this reason, there has been a positive correlation (0.11 since 1966) between the spending-house price ratio and subsequent three-yearly real returns on UK equities. The low ratio in 2006-07 did a better job of warning us of trouble to come than so-called expert forecasters.
The fact that the ratio is now below its long-term average tells us that equity returns will be lacklustre by historic standards over the next three years. This is not necessarily a frightening prospect. For one thing, long-term average returns on shares have been quite high - we're talking about post-1966 data, remember - and so below-average returns won't be too bad; around 6-7 per cent a year. And for another thing, the link between the ratio and subsequent share returns has been much weaker than it is for house prices, so there's lots of risk around this forecast. This risk, though, works both ways; the ratio points to a high-ish chance (over one-in-four) of negative real returns in the next three years.
But could it be that the usefulness of the ratio as a predictor is weakened by the fact that consumers are now more credit-constrained than they were in the past, and so cannot borrow in anticipation of good times even if they wanted to?
I don't think so, for two reasons. One is that credit constraints hit both the numerator and denominator of the spending-wealth ratio. Yes, they stop consumers borrowing and so depress spending. But they also stop some people taking out mortgages, and so depress house prices. It's not at all obvious that, net, the ratio is greatly distorted.
Secondly, credit constraints are not new. Before 1979, banks and building societies faced legal limits on how much they could lend. And yet the consumption-house price ratio was a good a predictor before 1979 as it has been since.
Perhaps, therefore, we should continue to take the ratio seriously. And it is warning us not to bank upon big rises in house prices or - to a lesser extent - equities during the next three years.
