sustained over the previous three years. in addition, home prices appreciated sharply during each year from 1997 to 2003. the cumulative rise since the late 1990s has exceeded the growth in per capita income by a wide margin. all told, the ratio of household net worth to disposable income - a useful summary of the sector's financial position - recovered last year to stand at a level about equal to its average over the past decade. before i turn to the business sector, let me address the frequently expressed concern that a bubble may have developed in house prices after several years of rapid increases. some of the measured price rise results from improvements in the quality of houses. houses are bigger and have more amenities than in the past, two characteristics that will lead to rising average house prices over time. but even after one controls for quality, increases in home prices have been outstripping general price inflation by a considerable margin in recent years. once again, the low interest rates are probably an important factor. houses, like other assets, generate an expected stream of future benefits. with low interest rates, these future benefits are discounted less heavily, which raises the asset's price today. low interest rates also push up house prices by boosting the demand for housing. of course, some of that increased demand is being met by the rapid pace of construction of new housing. but building houses takes time, and in the interim, higher demand will push up the price of existing houses. although we can identify the key forces behind the rise in house prices in recent years, we cannot be sure that the increases are fully justified by the prevailing fundamentals. still, we need to keep the recent increases in house prices in perspective : although house prices have been outstripping broad measures of inflation - even after adjusting for quality improvements - their rise is nothing like the increase in stock market prices in the late 1990s. in fact, the speculative forces that can sometimes drive equity prices to extremes are less likely to emerge in housing prices. first, buying and selling houses is a lot more expensive and cumbersome than buying and selling equities, which makes taking a speculative position in houses much more difficult. second, housing markets are much more local than equity markets, which are national, if not global, in scope. so if any speculative frenzy emerged, it would be much less likely to spread in the housing markets than in equity markets. finally, financial institutions have a much more disciplined process regarding the housing and construction lending

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