The US economy has defied expectations in recent months, continuing to power ahead despite a two-year campaign of interest rate rises that took the base rate from 1 per cent in June 2004 to 5.25 per cent in June this year.

But there are growing signs that the rises, which ceased in August, are taking their toll on US consumers, who account for about two thirds of the American economy.

For the moment, every piece of bad news on the housing market — so crucial to the economy — seems to be tempered by a surprise piece of good news.

The benchmark Dow Jones industrial average keeps hitting new highs, signalling that investors believe that the outlook for the economy is strong. But many economists are becoming convinced that a housing slump, or even a crash, is inevitable because the high prices are not based on any economic reality.

Leading the pessimists is Peter Schiff, chief executive of Euro Pacific Capital, a broker based in Connecticut. He argues that house prices will experience an unprecedented collapse, falling by as much as 70 per cent in some areas.

If a house has risen in value several times over in recent years, then it is ludicrous to think that it cannot fall by that amount, he says, drawing a comparison with the dot-com boom and bust in the late 1990s and early 2000s.

Two reports out yesterday appear to bolster Mr Schiff’s argument. The first, from George Wimpey, gave warning that the housebuilder faced “very poor” conditions in the US, where cancellation rates averaged 50 per cent in the second half and the forward order book was worth 68 per cent less than a year ago. In the second, it emerged that US mortgage applications slumped by 10.2 per cent last week compared with the previous week.

The housing market is a crucial component of consumer spending, which, in turn, is a crucial driver of the economy. When consumers are confident that the value of their house is rising, they are happy to take out loans against their properties to spend on goods and services.

The US economy has proved remarkably resilient in the face of terrorism, growing fuel costs, the threat of inflation and rising interest rates. But a few more pieces of bad news about housing could have a significant impact on the American pysche.

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