Do you go out and spend more as a result of your new-found housing wealth, even though income growth is so soft? The Reserve Bank is forecasting that many of us will do exactly that over the next couple of years, by consuming a higher proportion of income and saving less. Indeed, this "wealth effect" – where increased wealth flows into higher consumption – has been one of the ways in which the RBA had been hoping that lower interest rates would reignite growth over the last few years. Despite a sustained boom in Sydney prices, however, there's growing evidence to suggest consumers aren't reacting as the central bank had expected. In other words, it's becoming clearer that surging house prices don't encourage us to go out and spend like they used to.

Deciding to spend more of your income simply because your house has gone up in value may sound a bit simplistic, even foolhardy. But the wealth effect is a well-established idea within economics, and there's been a strong correlation between the property market and household spending in the past. Westpac's new chief executive Brian Hartzer last week speculated it was probably one reason why the RBA made its surprise move to cut official interest rates to a record low of 2.25 per cent this month. And the Reserve Bank's latest Statement on Monetary Policy, published Friday, assumes households will cut the share of income being saved because recent increases in wealth, most of which is property-related, have made them more confident to spend their dough. After all, this is exactly what consumers did during the last big housing boom of the early 2000s.

Buoyed by big increases in property prices, consumers allowed spending growth to outpace income growth by 0.75 of a percentage point a year in the decade to 2005. This led to a steady decline in the savings rate, which even turned for a while, meaning people were spending more than they earned. The main way in which higher house prices spilled over into extra spending was through increased use of debt products, such as home equity loans, which allow people to borrow against the value of their property for other types of spending. Fast forward ten years, and central bankers appear to be willing us on to curb our savings habit and spend a bit more in response to the latest surge in home prices. The RBA last week noted that the share of income we are saving has dipped to 9.3 per cent, down from more 10 per cent a year earlier, and this is helping to support a tentative recovery in consumer spending.

The savings rate was forecast to dip further, albeit gradually, because it expects wealth effects "to operate as they have done in the past". To many observers, however, this looks increasingly unlikely. The reason for this is simple: consumers remain deeply reluctant to take on debt to fund their shopping habits, no matter how much the housing market boosts their paper wealth. Bank of America Merrill Lynch economist Saul Eslake points out there has been minimal growth in non-housing lending, such as personal loans, or lending for renovations, since the global financial crisis. He also highlights that the closely watched ratio of household debt to income has broadly stabilised at close to 150 per cent for the best part of a decade – suggesting that in aggregate, households think they have enough debt.

This stabilisation is significant, because one of the main ways in which consumers can access the value stored in their homes is through loans. After all, you can't sell down 10 per cent of your house, as you could a share portfolio. JP Morgan economist Ben Jarman, who investigated wealth effects last year, makes the point that it's not just a question of economics, it's also one of household accounting. For house price rises to translate into extra spending, consumers either have to save a lower proportion of their income or take on more debt to finance the extra spending. His research concluded there has been little willingness to do either of these things to any great extent, notwithstanding a gradual decline in the share of income being saved in recent years. Things could change, of course.