How bad can it get? One forecaster thinks rates may fall to as low as 2 per cent

The underlying figures tell a different story. Transactions in the first quarter were 24 per cent lower than the same period the year before. As for Bovis, the company admits to selling 16 per cent fewer homes in the first half, of which a much higher proportion were social or third party housing and therefore of lower margin.

Reservations are below what the company was hoping for, while the company's high-profit, four- and five-bedroom, detached homes are now taking an average of 20 weeks to sell, against just eight weeks a year ago. That's because their purchasers are finding it so difficult to sell their own homes.

This doesn't look like a robust or even stable housing market to me. To the contrary, the market seems to be slowing at a pace powerfully suggestive of an impending road crash. What's this likely to mean for interest rate policy?

A little while back the Bank of England published research to suggest that the historic link between house prices and consumption may have been broken. The only real evidence for this was that house prices had been rising much more strongly than consumption, breaking a correlation where the two roughly tracked one another.

Furthermore, the theory hadn't at that stage been tested in a downturn. If house prices were to slow or start falling, would consumption just carry on as before? This always did seem rather unlikely, and although it is possibly too early to rush to judgement, recent evidence is that consumption is still very much linked to the fortunes of the housing market.

As the housing market slowed, so too has consumption. In the first quarter of this year, growth in household consumption at just 0.1 per cent was the weakest it has been in more than four years. But for rising government spending, there wouldn't have been any growth in the economy at all.

The picture hasn't changed much since then. In fact, it might have got a little bit worse. Everyone now believes that the Bank of England will soon be forced to start cutting rates again to support consumption, if not next month then certainly the month after.

But how low will they go? According to a study by a new consultancy founded by three former Bank of England economists, Fathom, they might even go as low as 2 per cent. Admittedly, the writers put the probability of this happening at just one in four, yet this is still a much higher likelihood than anyone still at the Bank of England would put their name to.

Whatever the Bank of England thinks, Fathom takes the view that the housing market remains central to the UK outlook. Mortgage approvals have recovered a little in recent months, but this may prove short-lived if the market follows the same pattern as the last housing downturn, when there was a similar recovery at this stage of the cycle which turned out to be a false dawn.

The danger is that falling house prices might frighten householders into reducing their debts, which in turn would lead to a further fall in consumption. Keynes called this effect on economic activity the "paradox of thrift". We are taught to think of saving as a good thing, but you can have too much of a good thing if it ends up clobbering the economy.

If the outlook is as bleak as this, why does the stock market, which achieved another three-year high yesterday, keep rising? One reason is that equities continue to look cheap against bonds, where yields are again approaching historic lows thanks to the benign interest rate environment just described.

A weak economy is hardly the best of environments for equities to thrive in, but balance sheets are strong, companies are generally better managed than in previous downturns and there's every prospect of the corporate sector riding through any coming economic storm relatively unscathed. In the long term, equities continue to look a better bet than bonds.

iPod sales surge ahead; prices fall

Sales of iPods are growing like topsy, according to the latest quarterly statement from Apple. This won't come as a surprise to anyone with teenage children, among whom an iPod has become almost as much of a must-have commodity as a mobile phone. Yet the scale of the progress must have astonished even the company's most fanatical of fans. Some 6.2 million iPods were shipped in the last quarter, an increase of more than seven-fold on the same period last year.

For Apple, this success is tempered only by the fact that though sales are rising like a rocket, prices are falling like a stone. This is what generally happens with new consumer electronic products. Eventually they are copied by low-cost rivals in the Far East. These never achieve quite the same iconic status as the original - somehow the Samsung personal stereo never seemed a match for the Sony Walkman - yet they will have a pronounced effect on the price.

Apple has helped maintain the success of its product through its own, proprietary download site, iTunes, but with so much new competition around, including the advent of multimedia devices which are mobile phones, games consoles and MP3 players, even the iPod has had to adjust its prices sharply downwards. Can the product maintain its lead? This seems unlikely given past precedent. Where's the Sony Walkman now? Eventually returns will be competed away to little or nothing, and if by then Steve Jobs, Apple's chairman, hasn't once more reinvented his company with some such other consumer breakthrough, it will again be in trouble.

MyTravel fined, but Byrne is off the hook

Blimey. The Financial Services Authority has finally got round to fining MyTravel for a breach of listing rules that happened a full three years ago. Perhaps strangely, however, it has failed to fine the men responsible.

Like an old holiday snap, memories are brought flooding back of the ebullient Tim Byrne, sacked as chief executive after nearly destroying the company. Mr Byrne and his then sidekick, David Jardine, had ignored a £24.3m hole in the company's accounts by deeming it an irrelevance that could be offset by one-off gains elsewhere.

So trifling did they think this exposure that they thought it not worth troubling either their fellow directors or their auditors with. Had they bothered, back in July 2002, to confess what they had found out, thousands of shareholders would have been able to cut their losses while it was still possible to do so. As it was, investors had to wait a further four months for the full extent of the mess to be revealed, by which time the value of their shareholdings had been virtually wiped out.

The FSA finds that neither of these men had sought to "deliberately mislead or withhold information from the market". Try as it did, the FSA found it impossible to prove otherwise. For Mr Byrne and Mr Jardine, the news yesterday that they are officially off the hook for the part they played in bringing the former Airtours to its knees must have been nearly as sweet as the £2m the company paid to get rid of them.

They should count themselves extra lucky that the incompetence they are accused of is not governed by the FSA's market abuse powers. To in effect fine the hapless shareholders of the company, rather than the responsible officers, is a curiously perverse outcome. A shabby end to a shabby affair.

j.warner@independent.co.uk