When you can pocket £50,000 by sitting in an average house in Brighouse, West Yorkshire for a year, it is obvious the British housing market has become a very strange beast. A largely anonymous place, Brighouse hit the headlines recently when a national survey revealed that house prices in this small town rose by 65 per cent in 2003, the largest increase in the country.

But, before you start bemoaning the collective mania for making cash out of homes and how this frenzy has priced the poor, the young and those without incredibly wealthy parents out of the housing market, you have to consider one thing: if house prices were not as high as they are today, we would probably be in the middle of the deepest recession in living memory. On the back of house prices rises, Brits have been borrowing and spending like there is no tomorrow and these shopping sprees have kept the economy ticking over while employers try to claw their way back from the abyss.

So I would like to raise a toast to all those avaricious money-grabbing idiots who have kept Britain's economy from sinking beneath the waves by pushing up house prices beyond most people's wallets and, in the process, have destroyed the hopes and dreams of an entire generation.

But it is not just the British economy that boasts this financial phenomenon. Australians have seen a housing boom and, in the US, some analysts argue that housing has been responsible for two-thirds of America's economic growth between 2000 and the first half of 2003.

However, lots of boring people who live in, say, continental Europe or South East Asia have not speculated on their homes or borrowed excessively from banks to fund a glamorous lifestyle they can't afford. And, maybe not coincidentally, the performance of all their economies has been terrible compared with our free-spending, Beckham-aping and credit card-abusing types. So should it be trebles all round for the English-speakers of the world?

Well, to answer that, you have to look at why house prices have risen in Britain, Australia and the US. If the increase in house prices is currently supporting the world's economy, what is, indeed, behind these massive rises?

First up, and let's be clear about this, we are in the middle of a bubble in the UK housing market. This bubble is just like the one we saw in the stock markets five years ago; it is a bubble because house prices have become divorced from any notion of real value. Stripping out the effects of inflation, the value of the average UK house has more than doubled over the last thirty years, with much of this increase occurring since 1996. Houses have not suddenly improved in the last five or six years; our houses are not twice as good as they were thirty years ago. All that has changed is that they are more expensive, and Brits are willing to pay higher prices.

Strangely, we have accepted the idea of more expensive homes incredibly quickly. The average cost of houses in the UK rose by 9 per cent each year between 1996 and 2002. A national figure, this percentage masks differences across the country, and our latest housing bubble originated in the South East of England.

The South East experienced a particularly deep recession in the early 1990s, one where house prices fell sharply. As the economy recovered, led by strong growth in the financial services industry in the City, house prices in and around London rebounded and began marching upwards to their recent dizzying heights. Even today, with prices just off their peak, the average London house costs a cool £220,000 and the average first-time buyer pad sets you back just under £190,000 (An average first-time buyer in London has to find around £20,000 for a deposit and costs; to get a normal mortgage – 3.5 times your salary – you need to earn a rather grand £49,000 a year).

The stock market bubble not only shows how markets can get out of touch with reality, but also explains spiralling house prices in the UK, US and Australia. As the value of stocks rose in the late 1990s, people working in growth industries, such as finance, IT and telecommunications, got rich quick with bonuses, good pay and share investments. All this cash ultimately fed into housing, and prices increased most steeply in areas where industry growth was strongest – London, Silicon Valley, New York and Sydney.

As the 1990s wore on, stock markets became the fashionable place to invest. The gains on offer were incredible, investing had become an easier process than in the past and often there were tax breaks to sweeten the deal. However, people began to suspect the stock market bubble might not last and started to shift their money elsewhere, often into housing. At around this time, some bright spark invented buy-to-let as a means for the moderately wealthy middle-classes to invest in property.

When the stock market wobble turned into a full-on crash, money flooded out of the stock markets and poured into housing. House prices responded to this massive influx of cash and shot up. In 2001, the year the stock markets plunged, UK house prices rose at a rate unseen since 1988. As uncertainty lingered in the stock markets, middle-class cash went elsewhere, mainly into bricks and mortar. After rising by around 15 per cent in 2001, UK house prices rose by 25 per cent in 2002 and a further 14 per cent in 2003.

In the US, rising houses prices saw homeowners reap massive windfalls. Households were able to take advantage of a rise in the value of their homes by refinancing their mortgages, taking out home equity loans or selling their properties at values far above their mortgages. By extracting equity from their property in these ways, American homeowners cashed in big time. Between 1990 and 1997, households' extraction of equity averaged around $150 billion (billion: a thousand million) a year. But, following the stock market collapse, house prices soared and so did the value of extracted equity: $6.2 trillion (trillion: a thousand billion) in 2001 and $6.6 trillion in 2002. Although the American economy is massive, more than $12 trillion dollars of extra spending is no drop in the ocean. Unlike Bush's tax cuts, which mostly benefited the rich who save their windfalls, most homeowners spent this extra cash from their homes, providing a huge boost to the American economy.

Mortgages also became easier to obtain in the UK and Australia because banks changed the way they funded mortgages. Instead of lending out money and then receiving it back month after month for twenty-five years or more, most UK and Australian mortgage providers now sell on the rights to those repayments to big investors. They then go out and find more customers to lend to. The process of selling rights to such repayments is called securitisation (click here read more about it), and it has led to fierce competition between different mortgage providers, leading to cheaper mortgages and more desperate lenders.

Interest rates are the other major factor. As the stock markets crashed, rates were cut rapidly. In the UK, there were seven quarter-point reductions in 2001 and a further one in 2003, bringing base rates down from 6 per cent to 3.75 per cent. These cuts made all forms of debt a lot cheaper, adding further fuel to the consumer boom and making it easier for Brits to go out and spend lots of money they didn't have. This consumer spending gave the rest of economy – full of weakened companies that had already racked up too much debt – space to recover. In the US, the Federal Reserve slashed interest rates much further: since June last year, the rate has stood at just 1 per cent.

So house prices grew because of low interest rates, securitisation and the switch from investing in shares to investing in housing. Many people then became accustomed to paying a lot for property and began to expect house prices to continue to rise, feeding the increases even further. They then borrowed massive amounts against their newly expensive houses, supported by low interest rates, and went out to spend – so helping the economy to avoid a recession that would have otherwise kicked in.

But with the global economy largely dependent on the health of the US economy, and the US economy largely dependent on consumer debt and increases in house prices, can it continue forever?

Unsurprisingly, the answer is no. At some point, prices go too far and first-time buyers feel that they cannot afford a house so they switch to renting. This has already happened across much of England, with first-time buyers now regarded to be "an endangered species" by the big mortgage lender, Nationwide. Without first-time buyers, the market is left to those that already own a property, but with no influx of new buyers to feed the fire that keeps prices rising, house prices are likely to level out or fall.

From one perspective, this may be no bad thing. The rapid rise in house prices has fed an inequality greater than any Thatcher could ever achieve. Property-owners have become wealthier without lifting a finger. Those without property have not; and if they want to buy a house, they have to take on colossal amounts of debt.

It is also a waste of money. With the stock market bubble, money poured into businesses. While most of the ideas were crap, at least it was investment. With the house price boom, there is little or no productive investment involved; Brits have just decided that they are willing to pay a lot more for something that is already very expensive. All that potentially productive capital is reduced to paper profits for homeowners.

But the Americans, and others, cannot continue spending. In no particular order: house prices will stall, interest rates will rise and debts will be paid off. The future of all our economies depends on the timing of these events. In the UK, US and Australia, if the consumer side of the economy begins to slow just as the rest of the economy picks up and there are no nasty losses of confidence, everything will be fine. Interest rates will gradually glide up, house price growth will slow but values will not fall dramatically, and the massive consumer debt burden will begin to be paid off.

However, it might not work that way. Apart from consumers and their housing fetishes, the global economy has been particularly gloomy over the last three years. There are some signs of a recovery in the US, but, as it is largely supported by house prices and debt, it is not too convincing and job growth is slow. Yes, President Bush may continue to cut taxes and, as it is an election year, spend a little more on job creation, but this is unlikely to have any major effect on the condition of the wider economy.

Although interest rate rises may cause a panic amongst heavily indebted consumers, there are few signs of increases on the horizon and analysts believe US interest rate rises are unlikely to occur soon. But there is always the unexpected. A fragile recovery based on keeping up the self-confidence of heavily indebted consumers will always be vulnerable to an "external shock", whether it is economic or political.

The health of the world's economies depends upon what amounts to a sleight of hand: that houses in the US, UK and Australia are worth far more than they were a couple of years ago. But we seem to need to continue to believe in the unbelievable until the rest of our economy recovers.

Our houses may be our homes, shelters to keep the weather out and to keep us warm, spaces to keep our possessions and an area of private space to live our lives. But, in economic terms, they are financial assets to be valued, bought and sold; they are now the lynchpin of our world's near-chaotic capitalism. We may make our homes safe and secure, but are their foundations strong enough to bear the weight of the world's economy?