be explained by medical underwriting of the mortgage that justifies a higher loan - to - value ratio for a younger customer if their life expectancy is impaired. again this an area that risk functions should be watching. the most important risk factor, however, is the long - term path of uk house prices. plausibly the risk of a long - term correction in uk house prices has increased as houses have become less affordable and rental yields have fallen. in england and wales the ratio of median house prices to median individual annual equity release rebooted : the future of housing equity as retirement income, rob thomas and dr louise overton, april 2017 all speeches are available online at www. bankofengland. co. uk / speeches earnings has increased from 3. 6 times in 1997 to 7. 6 times in 2016. but economist david miles makes a reasonable argument that this ratio might continue to increase and i am not going to make any predictions. i will though make a couple of observations. first, simple projections suggest that equity release mortgage books could face difficulties in scenarios of flat, as well as falling, nominal house prices. second, uk experience is that although house prices do diverge across regions, they tend to move in the same direction. so insurers might not be able to diversify away the risk to any significant extent. third, the experiences of, for example, the japanese property market between 1990 and 2010 and the italian property market between 2007 and 2017 show that it is possible for house prices in an advanced economy to fall over a period of decades ( chart 6 ). the matching adjustment the other major influence on insurers ’ asset allocation since the introduction of solvency ii is the matching adjustment. the rationale for the matching adjustment is that annuity writers are buy - and - hold investors with locked - in funding. provided they match the cash flows of their assets to those of their liabilities, they should rarely need to sell assets prior to maturity. they are not therefore exposed to changes in the market price of credit risk in the same way as other investors. the matching adjustment allows them to benefit from this advantage in two ways. first, they do not have to hold capital against the full risk that credit spreads will move against them in the market ; second, they are allowed to discount their annuity liabilities at higher than risk - free rates, reducing their liabilities and therefore boosting their current available capital. for uk insurers, the matching adjustment

##s consider first the main headwinds hampering growth. most obvious is the fiscal consolidation now underway in the uk. public sector spending, as a share of nominal gdp, is projected to fall by around 8 percentage points over the next 5 years. my central view is that the direct impact of this reduced spending, via the impact of lower government procurement and smaller transfer payments, is unlikely to derail the recovery. the spending cuts will certainly dampen growth. and some households and companies directly affected by the cuts could suffer significant hardships. but the substantial stimulus from monetary policy and the lower level of sterling should ensure that the recovery continues. the impact of the fiscal consolidation may be partially mitigated if it causes businesses and households to become less uncertain about their prospects and so behave less cautiously. but the reverse is also possible. in that regard, it is perhaps notable that, following a brief revival, measures of consumer confidence have fallen back since the spring of this year. the importance of keynes ’ animal spirits has been demonstrated all too clearly by recent events. although the recession was triggered by a financial crisis, the speed and severity of the downturn was greatly amplified by the accompanying collapse in confidence, as companies and families pulled back on spending and increased savings. more recently, the pickup in private sector spending has occurred alongside a fall in the household saving ratio and a stabilisation in company saving. a recent survey carried out for the bank provides some evidence on households ’ attitudes towards the fiscal tightening. 1 90 % of survey respondents said that they thought the fiscal consolidation would have some impact on them. perhaps surprisingly, a majority of these households said they had not yet taken any actions in response to the consolidation. but it ’ s clearly still early days in this process and there is a chance they will react more as the impact of the austerity measures increases. this is something that the mpc will continue to monitor carefully. a second headwind tempering the pace of progress is that uk banks are still not in a position in which they can lend normally. as many of you know only too well from your own experiences, the banking crisis led to a marked tightening in credit conditions, making it difficult for businesses and households to borrow. uk banks have made significant strides over the past year in strengthening both their capital and funding positions. however, the extent to which that has led to increased access to credit appears to have varied across different sectors of our society. for large businesses, conditions do appear