A boom to make you rich, if you move to a tent

THE conversation is so familiar. At polite middle-class dinner tables, smug couples swap stories about how much the value of their houses has risen.

The interest they receive on their savings is pitiful. The value of their Isa may be looking a bit sick. But their house? It's the best investment they ever made. Yes, the canniest thing one could have done over the past six years was to borrow lots of money, buy a brick box and sleep in it.

The most recent evidence comes from the Nationwide. Its figures show the average price of a home shot up by 2.1% in the past month. Put another way, the price of a home rose by roughly the same in a month as prices in the economy as a whole have risen in the past 12 months. Without question, this is a real boom.

And the result? People - or at least those who own or are buying a house - feel richer. A knock-on effect of this, as has been vividly demonstrated over the past two years, is that they feel increasingly content to take out loans against the value of their houses to spend the money on other things.

You fancy buying a boat? Then borrow against your house. A holiday of a lifetime? Extending your mortgage is clearly the most sensible way to raise the money. Go for it. After all, the value of the equity in your house is going up and up. Why not spend it now? Property prices and consumer confidence go hand-in-hand.

The notion of feeling better off because property prices have risen seems simple. If you move into a house worth £100,000 with an £80,000 mortgage, the value of your stake in the property is £20,000. If the value of the house increases to £120,000 and your mortgage is still £80,000, then the value of your equity is now £40,000. You are wealthier than you were.

But this is a very particular type of wealth. It is not simply a figure on a bank statement. It is not a stockbroker's valuation of a portfolio of shares. You live in a house. It gives you shelter and comfort as well as a warm feeling of becoming wealthier.

And whereas money from a bank account can be spent and shares can be sold, a house is very different. You will never see this extra wealth that is meant to be yours unless you sell up and move to a part of the country where houses are cheaper. (Perhaps a move from Guildford to Bradford might do the trick.) Or you could go the whole hog, sell up and live in a tent. Or, of course, you could do the really decent thing - die and let your children benefit.

The essential point is this. A house worth £100,000 a year ago might be worth £120,000 today. But it is still the same house. It hasn't grown an extra room. The downstairs loo hasn't been retiled. There are no more fruit trees in the garden.

And so a rising property market may well make us feel better off. It may well make our personal balance sheet look stronger. But unless and until we take the Bradford, tent or death options, we are unlikely to see any of this money.

Yes, of course we can borrow for the boat or holiday. But that is merely using the house as security: a loan is still a loan; an extra loan means bigger debts.

And imagine the position of a couple in their twenties. They are first-time buyers. They scrape together sufficient deposit. They scrutinise the personal finance pages to find a good deal on a mortgage. They make the plunge and buy their first, cheap, pokey flat. Then, with their feet on the bottom rung of the property ladder, they watch nervously to see what the market is going to do. It scoots up. They rejoice. Their flat is worth more than they paid for it. Hoorah!

In fact, this reaction is completely irrational. Assuming our young couple don't plan to spend the rest of their days in this one-bedroom flat, they should weep, not cheer, when property prices rise.

They will, at some stage, want to move to a bigger, posher place. Yes, by the time they come to move, the price of the flat they'll sell will have risen. Say it has increased 50% from the £50,000 they paid to £75,000 now.

But what about the house down the road that they now crave? When they moved into their flat, the house was worth £100,000: to move from flat to house would have cost £50,000. Now, the house is worth £150,000, the flat £75,000. They need to find £75,000 to make the move. In short, trading up costs them £25,000 more than it would have done had property prices remained static. Our couple - now approaching their thirties and contemplating parenthood - are worse off because house prices have risen. Tents aren't on the agenda. They certainly don't plan to die for a while. Bradford has yet to beckon. This young couple are the ones suffering the effects of the property boom.

Yet, if you own your home, can you really bring yourself to pray for house prices to stop rising? Can you resist looking smug when the dinner party chat turns to property prices?