Where did my home equity go?

This chart is the UK economy's dirty little secret. Years of strong economic growth were bankrolled by housing equity withdrawal.

The formula was breathtakingly simple:

Banks provided huge amounts of credit at low interest rates to the housing market.

This cheap credit created double digit house price inflation, which in turn generated huge increases in housing equity.

Homeowners used these gains in housing equity to take out home equity loans.

These home equity loans fueled a consumption boom, which maintained impressive GDP growth rates.

The underlying health of the economy remained, at best, ropey. Real income growth was distinctly unimpressive, while productivity growth was weak.

Her Majesty's government also played its part. During the boom years, Brown borrowed to pay for a surge in public expenditure, running up some impressive fiscal deficits along the way. The excesses all ended up in the external deficit. Both the consumption boom and the government spendfest pulled in imports.

House prices are now falling, and everything goes into reverse. Home equity is declining and therefore banks can not issue any new home equity loans. Consumption is now contracting, tax revenues are declining and the economy is in recession.

Brown still thinks he can spend his way out of trouble. In reality, he will have a hard time covering existing expenditure plans as the tax base shrinks and unemployment rises.

If only the house prices could again start to rise, then everything would be alright. If only.......