Owning me, owing you...

We are drowning in debt. All forms of borrowing are surging - public, private, unsecured and secured. Personal debt in the UK, including mortgages, is now at a historic high of 112 per cent of disposable income. This is higher than in the US, and higher than the 90 per cent seen in Britain the late 1980s.

Many commentators, described by Bank of England Governor Sir Edward George as 'gloomsters', warned that consumers would collapse under their debt burden. But retail sales figures showed the reverse.

Much was paid for from the still rising value of housing. John Butler, UK economist at HSBC, says that two-thirds of last year's consumer spending growth was paid for from mortgage equity withdrawal. 'Without that, consumer spending growth would have been 1.6 per cent [rather than 4.7 per cent], the worst since the last recession.'

Indications from high street banks suggest that mortgage equity withdrawal remained strong in the final quarter of last year. The gloomster stories of a housing market crash appear to have stopped the acceleration of this form of borrowing. But total mortgage withdrawal for last year will be more than £40 billion - one hundred times as much as in 1998.

So last year the housing market rescued the economy. Britain still had its worst growth in a decade, but 1.6 per cent was respectable by international standards. However, the overreliance on house price growth has spooked economists, the International Monetary Fund and the ratings agencies.

Secured lending (such as mortgages) is generally better for the economy than an explosion in unsecured lending, such as credit card debt. But there is little evidence that overindebted consumers are using rising house prices to cut back unsecured loans. Instead they are spending more. And while this probably prevented recession last year, it leaves the economy even more sensitive to an over-inflated housing market.

Every pound of mortgage equity withdrawal increases the likelihood of negative equity. And though the gloomsters were proved wrong by high street sales figures, their number was enhanced by a remarkable report from the Financial Services Authority.

This points out that 'although mortgage arrears have continued to fall, credit card arrears have been increasing over the past few years', and that this 'represents a leading indicator of emerging difficulties in the mortgage sector'. It points to trouble for lenders and borrowers alike.

Underpinning the general belief that house prices always go up is a strong belief that interest rates do not. But there are other triggers for a fall in house prices, as the FSA report shows. The equity bubble burst simply because people could no longer afford the stratospheric prices.

Then there is a gloomy prognosis for jobs and incomes. Companies appear to have hoarded labour, keeping unemployment low, in expectation of a relatively short global downturn. But jobs shed in any number could prove as significant a trigger for house price falls as rising interest rates.