Britain is living in a bit of a fool's paradise

Robert Barrie
Chief UK economist at Credit Suisse First Boston

"Just because it's a big number, that doesn't mean it's a problem. It's part of a big balance sheet, and the numbers on both sides of the balance sheet are very large. We have an awful lot of liabilities, but we have an awful lot of assets as well. We've got more of everything.

"And the balance sheet is quite diversified: we don't just own houses. As long as everything doesn't go wrong at the same time, it's all right; we've been through a stock market crash, and we have weathered that storm.

"The thing is, house prices don't just fall for no good reason. [Apart from] a big rise in interest rates or unemploy- ment for example, it's difficult to see that happening. When we have had hard landings in the past, interest rates have risen a lot, and quickly and unemployment has risen as well.

"By the time we have seen interest rates rise a little further, we might be more conscious of the amount of debt, and by the need to service that debt. If you have borrowed a lot, and interest rates go up a lot, you're going to struggle with repayments.

"I'm not sure we have really felt the full effects of the interest rate rises we have already had, because there are so many fixed-rate mortgage deals in the market."

Jonathan Loynes
Chief UK economist at Capital Economics

"One of the reasons debt worries us is because of the asset side of households' balance sheets. It's a combination of the sharp increase in debt, plus the evidence from the housing market that it's overvalued and some correction is very likely.

"People have been borrowing money to invest in housing, and that's clearly better than borrowing to go on a spending spree. And so far it's been a very good investment strategy: they've become wealthy as a result. That's all very well as long as the price of houses keeps rising. Were you to see a drop in the value of housing assets, then you might see households reassessing their liabilities and deciding to borrow a lot less.

"We expect house prices to fall by up to 20% over the next few years, beginning around the end of this year. If you've mortgaged yourself to the hilt to buy a house, and the price then drops by 10-20%, you might feel an awful lot less happy about the amount of debt you've taken on.

"The second worry is that as interest rates go up, people may start to run into problems actually servicing the debt, and that affects spending. That's the danger. If you look back to previous periods when the housing market dropped and it had a knock-on effect on consumer spending, it resulted in a slowing or even in a fall in GDP. The historical omens are quite worrying.

"Other drivers remain positive, though. Income growth might help to take some of the sting out of falls in wealth."

Martin Weale
Director, National Institute of Economic Research

"People tend to look at these numbers and think it's dreadful, but the fundamental problem isn't, 'are our debts large or small?', it's 'are we doing enough saving?' The country as a whole will be poorer in the future if we don't save enough now.

"It looks to me as if we are not saving enough; it's the better placed economies like France and Germany that are doing better. I get the impression that Britain is living in a bit of a fool's paradise.

"Rising house prices are a very effective way of pilfering from the future: the people who aren't yet born and don't yet own houses lose out; it's a transfer away from them and towards homeowners.

"Gordon Brown could say something in the pre-budget report in the autumn about what he thinks about the question: 'Is the nation saving enough?'"