Peter Jackson column

Nov 17 2005 By Peter Jackson, The Journal

House prices continue to show signs of recovery and experts expect modest price increases over the coming months.

This is the second consecutive month the Royal Institute of Chartered Surveyors have brought us such optimistic news on the housing front and it comes on top of other favourable indicators.

And house prices are important. Upon them rests consumer confidence, which in turn fuels the High Street, which in turn drives financial services, which funds the economy. House prices are as much a fundamental of our economy as the harvest was to a medieval peasant, for if house prices fail, we all starve.

But this cannot be a healthy state of affairs. As I wrote last month: "A recovery based on paper gains in the value of homes, set against very real threats of rising fuel prices, international political uncertainty and economic stagnation in Europe would not be healthy."

One cannot spend what one hasn't got, earned or made, and any attempt to do otherwise must result in tears before bedtime. When you consider that consumer debt now stands at some £1 trillion, you must have the uneasy feeling that bedtime can't be far away. Especially as some economists are already forecasting bankruptcies to double by 2008.

It had looked as though we were going to avoid this. The overheated housing market delivered the soft landing we had hoped for, and we could have been in for a period of dull but steady readjustment.

Growth would not have been spectacular and belts would have had to be tightened a little, but at least we could have looked forward to gradual reduction in the mountain of consumer debt, a slow defusing of the timebomb. Instead of that, no sooner has the housing market come gently down to earth than it seems to be taking off again.

This would not matter so much if it were not likely to make people believe they can crank up their debts even more. Indeed, the retail sector is positively praying that they will. Thus we get an economy which is in reality a house of cards - credit cards.

If this were not bad enough, the Government has been as profligate as the citizen, with public spending reaching nearly £520bn compared to £320bn in 1997/98.

And guess who will have to pay for this in addition to the credit card?