Yesterday and this morning it was a double whammy for the housing market.

Mervyn King put the boot in, and HBOS gave its gravest warning yet.

In his Mansion House speech, Mervyn King said, “The squeeze on real take-home pay will arguably be an even more significant restraint on consumer spending this year than the credit crunch. And it will affect the housing market too – lower demand in the High Street will go hand in hand with lower demand in the property market.”

HBOS predicted a 9 per cent fall in house prices this year.  In a trading update, it also said transactions in the market will be 45 per cent of the 2007 level.

But here is the Bill oddity.

In May, the Halifax index, published by HBOS, had house prices down 7.8 per cent from peak.   In August last year it had average price as 199,600: in May, £184,111.

So, if the HBOS prediction is right, then the next four months will only see very modest falls.

By contrast, it had average price falling by £12,384 over the last four months.  If it records a similar fall over the next four months, the fall from August 2007 to August 2008 will be 14 per cent.

So actually, alarming as the HBOS prediction may seem, it is actually quite optimistic, and assumes the worst is over.  Are they right?  Just bear this in mind.  In February, HBOS said house prices would be flat this year; in April they predicted falls in the mid-single figures.

But how will falling house prices affect the economy at large?

In his speech yesterday, Mervyn King said, “I have said in the past that there is no causal link between house prices and consumer spending. That remains the case. How closely they move together depends on the underlying forces that are driving them both. This year, the squeeze on real income growth is likely to mean that both house prices and consumer spending weaken together.”

In other words, the factors that cause house prices to fall may cause consumer spending to fall, but falling house prices themselves won’t be the catalyst.  If you like, falling house prices and slowing consumer spending are cousins, even siblings.  But they both sit at the same level in the family tree of cause and effect.

Give Mervyn King and the Bank of England full marks for being consistent.    They have continuously insisted there is no direct link.    When house prices were rocketing they said that this was not causing consumer spending to rise. And now they’re falling, they say there will be no corresponding fall in spending.

This belief is based on data earlier this decade showing only modest changes in consumer spending at a time of rising house prices.

Look, Mervyn King is a giant among economists, and we are like David’s younger brother in comparison to the Bank of England’s Goliath.   But do you really believe rising or falling house prices do not affect consumer spending?

Surely this goes against common sense.  This goes against what we all know some people do.

If the value of our home is rising, many of us feel good.  We feel that if we push our credit card to the limit we are taking less of a risk.  We don’t need to save for a rainy day, because we have so much wealth tied up in our home.  Some even see their home as their pension.

If the data does not back up this argument, then we suggest the Bank of E needs to look closer at the data.

Maybe the real reason is this.

Consumer spending hit unsustainable levels in the late 1990s.

Under any normal conditions it would have fallen back.  But rising house prices mitigated against this.  Instead of cutting back, we just carried on.     In short, there is a direct link, but it was hidden by the consumer boom of the late 1990s.