Catherine Pepinster: Even those made rich by the boom will profit from a fall in prices

The property bubble is likely to burst – and not a minute too soon

When the BBC first broadcast The Forsyte Saga in 1967, the most memorable character was the ogre Soames, a man obsessed with possession: of his wife, his paintings, and his houses. He was a monster who passed into legend.

Then, a few weeks ago, a new version of The Forsyte Saga was televised, and there was Soames, a man as much sinned against as sinning, someone we might even sympathise with. And is it any wonder? We still might not like how he treats his wife, but there is something so English about Soames Forsyte, the man of property. No other nation has such a deep, emotional attachment to home ownership as ours. No other pursues the dream of property, frets so much about mortgage deals, discounts, repayments and endowments. Who else around the world would chatter as we do about golden postcodes, lofts, and location?

But the dream has about it the stuff of nightmare. House prices have continued to soar, pleasing home-owners but pricing a growing number of people out of the market. So fast, and so high have they risen that last week the Bank of England warned that the continuing hike was unsustainable, and that owners should be careful not to take on too much debt. So are we in for a crash? And what would the man of property think? Would the usually cautious Soames recommend us to sell, sell, sell?

The economic and political consequences, given that people's homes are their most valuable single asset, are considerable. As house prices have risen, so has consumer spending, by around 3.5 per cent a year in recent years. If the housing bubble continues to expand, spending is likely to keep rising too. People who think their home is worth plenty will buy carpets, curtains, sofas and kitchen extensions, new floors and roof tiles. Their sense of well-being will probably encourage them to reach for the plastic and spend, spend, spend on clothes and holidays, too. They will view the alternative with puzzlement. What is the point, they will wonder, in paying rent and not enjoying the capital gain from living in the biggest pile one can afford? If they stopped for just a moment, though, and wondered about those who do not, and cannot buy, they would be fearful indeed. For there lies the real problem for us all.

The surging property market has surpassed all predictions. Last month the Bank of England forecast that prices would ease back. But mortgage lending figures cast doubt on the prediction. The Halifax reported that house prices rose by 4.2 per cent in May. That's equivalent to the average home rising in value by £140 a day. It beats working, doesn't it? The two-thirds of Britons who are home-owners are enjoying a profit equal to more than half their incomes from employment, just by having a mortgage.

But booms, as recent history reminds us all too well, turn to bust. There was house-price inflation in 1972 and 1973, and a consumer boom, only for them to be felled by 25 per cent retail inflation in 1975 and International Monetary Fund-imposed deflation in 1976. Then there was an upturn in 1976 and 1977, followed by another recession. Then came the spectacular Lawson-fuelled house price hike of the late 1980s, followed by a disastrous fall in prices, which dropped by as much as 40 per cent in some neighbourhoods. The tumble led to misery for thousands who saw their homes drop in value, well below the sum they still owed their lenders. Repossession was a humiliation which became all too familiar.

Could it happen again? Does nemesis, in the form of a glut of "for sale" signs and boarded- up des-res properties, await us? The Bank of England clearly thinks there is trouble ahead. David Clementi, deputy governor, warned in its most strongly worded statement on the housing market so far, that the rate of price rises is unsustainable. The market today, though, is not the same as it was in the past three boom-and- bust cycles. There is no overall boom this time. The economy has been much more stable in the past five years, both in terms of output and inflation. This makes prospective homebuyers more confident about their ability to keep paying the mortgage.

What makes today different from the past are the deals on offer and the (up until now) low interest rates. Paying the mortgage was, traditionally, far less affordable. Now, the burden is much easier to bear. According to the Nationwide Building Society, borrowers spend around a quarter of their take-home pay on mortgage payments in the first year of a loan. In the 1980s, they would pay half their net salary.

But, in the past, things could only get better. As inflation rose, so the mortgage debt was eroded. The current economic climate will mean that the debt will stick around far longer. Borrowers will no longer benefit from a build-up in housing equity – except of course for the escalation in values. Your debt might not disappear as fast, but thousands and thousands of pounds will keep adding to the value of your property.

With that debt still needing servicing, a sudden hike in interest rates could be devastating to borrowers. Many analysts are predicting a correction to the market, particularly after the Bank of England's comments, which could well foreshadow a rise in interest rates. If that correction comes soon, it is likely to be far less painful for homeowners. The longer the boom goes on, the more probable it is that the correction will be greater – and a very unpleasant bust will occur.

So the Soames Forsytes among us will sleep easier, of course. The more daring may care to sell up now at the top of the market, stash their cash in bonds, and await a drop in prices before buying again. But the rest of us for whom a house is still home, as well as an investment, will be grateful that our homes continue to edge up in value, bit by bit, even if the glory days of soaring runaway prices are over. Yet being so complacent would be foolhardy, for there is far more at stake than property prices here.

The housing market in this country is now so distorted that it is affecting the country's well-being. Any government ambition to make much-needed improvements to public services can only be thwarted if nurses, train drivers and teachers cannot afford a mortgage. People's freedom to live where they like – and where they are needed – will be increasingly limited if they cannot afford to live in the South.

The Government has so far taken little interest in the problem – and no wonder. It enjoys a steady stream of revenue from a booming property market: since 1997 the Treasury has secured £2.2bn in stamp duty. It could continue to fill its coffers and wait for the market to crash, enabling property to become much more affordable. In doing so, it would allow misery to continue today for those being priced out of the market, until their misery is replaced by the wretchedness of those who would lose their homes in a property crash.

Or it could intervene. It could ensure a steady supply of affordable homes by increasing the provision of subsidised housing association homes for rent and to buy. It could ease planning laws, enabling more homes to be built, and offer developers cash incentives to build in rundown areas. It could consider a housing allowance, funded by stamp duty revenues to help people with their housing costs. And it should act to create disincentives to stop individuals and organisations – including government departments – from holding on to vacant homes. That 80,000 properties stand empty in this country is scandalous.

This is an administration which has always prided itself on joined-up government. Affordable housing is part of the joined-up solution to better health care, better schools and better transport. And there is nothing that a Soames Forsyte, an English man of property, likes better than a well-ordered society.