Business view: The catastrophic effects of a housing crash in never-never land

Last week's bankruptcy figures from the DTI look on the face of it like OK news. In the teeth of a recession, company insolvencies are falling and personal bankruptcies rose by only 11 per cent.

But as with any bit of statistical "good news" from the Government, you have to read the fine print. The reason why fewer companies are going bust is not because the economy is robust, it is because banks are far more reluctant to pull the plug on businesses than they used to be, because they know how these problems tend to multiply. Banks bring in accountants to sort out troubled companies, saving them from administration or liquidation and so keeping them out of the insolvency statistics. Ask any accounting firm whether their "corporate recovery" (or whatever they call it) department is flat out, and you will get a very strong yes.

For the poor man on the street, the story is not as good. If you are not a big borrower, it is not worth the banks' while to try to reschedule the debt. It's easier for them to call in the bailiffs.

That is why personal bankruptcies are up 11 per cent in the first three months of this year. And while the majority of bankruptcies used to involve people who ran businesses and were pushed over the edge when their companies collapsed, now more than three out of five bankruptcies are thanks to consumer debt.

This is no doubt the legacy of the credit boom of the last few years. It has become easier to run up a few grand on your credit card, get a personal loan, top up your mortgage and live high on the never-never. The average Briton is more than £30,000 in debt – that's the equivalent of two years average disposable income.

Thankfully for our nation of debtors, interest rates are low – and they could be going even lower next week. This means these onerous borrowings are affordable; if you can remortgage at 5 per cent, then your £30,000 of loans are costing you only £1,500 a year.

But you don't have to be Alan Greenspan to see the problems. First, if interest rates start to rise, the affordability of these loans becomes an ever greater problem. The more defaulters, the more bad debts for banks, the more they have to charge for loans, and so the more defaulters.

Then there is the repayment dilemma. This credit boom has been based on two things – economic growth and rising house prices. The former has stalled. And so, it now seems, has the latter. Even the ever optimistic Halifax said that house prices rose only 0.4 per cent in April, and in the affluent South there has been some retrenchment.

The growth of secured lending – what you or I might call mortgages – is based on the idea that house prices will rise. If your house was worth £100,000 when you borrowed £80,000 and it is now worth £200,000, selling it off to pay your debts is less painful. But if the house price drops to £90,000 or even £80,000, life suddenly gets a lot more difficult.

Peter Hughes-Holland, the personal finance expert at insolvency body R3, fears a tsunami of bad debts and bankruptcies: "Recent rises in the level of personal debt may mean there are many more accidents waiting to happen."

The Bank of England and the Treasury have been worried for a while that galloping house prices could cause problems for the UK economy. But, as personal debt woes start to bite, they might now realise that the alternative is a lot worse.

The corset and the corpulent

When I studied economics, I learnt about the corset. This was a device used to try to control inflation by restricting certain economic activities. "But like a woman's corset," sniggered our professor, "it makes the fat come out in another place."

And so it is with fat cattery. This season AGMs have brought shareholder activism, moralistic outrage from commentators ranging from our sister paper to the Secretary of State for Wales, and the typical CBI response of setting up a committee to look into the matter. But every time you try to stop one avenue of excessive reward, another emerges.

Suggestions that the Government might legislate are plain stupid. Never mind the terrible precedent created by interfering in employment contracts, think of the US experience. Bill Clinton's attempt to limit executive wages led to the growth of the share option culture, which in turn fuelled the accounting scandals of Enron and WorldCom.

j.nisse@independent.co.uk