House prices would drop for sure within three years. So said a group of Oxford economists - well, almost three years ago now. But still we hear that prices, particularly in London and southern counties such as Oxfordshire, are continuing to rocket through the roof. So what is happening? More to the point, does anybody know?

Prof John Muellbauer, of Nuffield College, who has made a study of house prices and their effect on the economy, said: "Prices go on up for four reasons - income growth; population growth, thanks to immigration; lack of house building; and low interest rates."

He added that in Oxfordshire we are also affected by the London Stock Exchange, with its wealth of recent mergers and acquisitions; by very rich people earning huge bonuses in the City. They force up prices in London, and Oxfordshire "benefits" - if that is the right word - from the ripple effect outwards. It is, after all, an attractive county, within commuting distance of the City fleshpots.

Prof Muellbauer said: "The very rich are forcing up prices for desirable houses, so the rich are becoming richer. At the same time, there are now factors stabilising prices for poorer people.

"For instance, following the crisis in the subprime market in USA, lenders are becoming less ready to lend to subprime borrowers here. However, because of the trickle-down effect, prices may not actually be depressed."

The result could well be that it could become ever more difficult for those without a well-paid job, or without family members able to help them out, to get on the housing ladder at all.

Prof Muellbauer added: "It's pretty shocking that a so-called New Labour government could preside over an economy in which the rich are so obviously getting richer and the poor poorer.

"Okay, there are efforts at tackling social exclusion and child poverty, and there are means-tested benefits, but this difference in access to housing equity probably far outweighs other causes of the wealth gap."

And will house prices in desirable areas continue inexorably up, despite the predictions of academics, including Prof Muellbauer, three years ago?

"Even Mervyn King, chairman of the Bank of England, has said that we have been lucky. If all those four factors I have mentioned stay in place, plus the Stock Exchange rise, and perhaps in Oxford some extra effect due to the Government pumping money into higher education, then they will rise. But if any one of them goes into reverse, we could be heading for trouble."

The recent Lyons report illustrated the privileged position in which the very rich find themselves. Only in Britain does someone living in a house worth, say £1m, pay exactly the same in council tax as someone paying £20m. So the Duke of Marlborough at Blenheim Palace pays the same as a moderately well-off academic in North Oxford.

At the other end of the scale, Prof Muellbauer pointed out that although Britain has exposed itself less to bad debts on the subprime market than has the USA, where lenders are going bankrupt after making far too many injudicious loans to people who could not keep up mortgage repayments, some of the organisations behind British lenders could be American - so the money supply needed to fund poorer people here could be smaller.

At root, housing supply in Britain is simply not keeping up with demand. Prof Muellbauer said: "True, we are building slightly more units now, but they are smaller. The square footage is about the same."

He added that the market at the bottom end of the housing ladder was "possibly a bit overvalued". All in all, it seems that anyone hoping to profit from the current housing market should heed a recent report from property website PrimeMove.com and buy in areas that have already "arrived." They should look for German cars in driveways, private nurseries, and the distance to the nearest Waitrose.

But how much is the economy - the money people feel they can afford to spend on those cars and in the local Waitrose, come to that - affected by the "feelgood" factor engendered by the knowledge that your house is going up in value?

Prof Muellbauer said: "The collateral wealth effect is, I think, far less than the ten per cent that some reports have stated. On the other hand, I think it is not nothing, as the Bank of England has implied."

In other words, if you work out that your house has gone up £50,000 in value you might go out and buy, say, that digital radio, using your credit card, which you might not otherwise have bought; but it will be a "one-off" action; you will probably not go on spending more than you otherwise would have done - until, that is, you hear that your house has gone up again!

Unlike the market in Spain, where some experts are predicting turmoil in the economy and falls in house prices - because the economy as a whole has become over-dependent on the property boom, British prices are likely (with continued 'luck') to stay high for "desirable" houses. Less desirable models, in less desirable locations, though, will become what estate agents call "harder to sell".

Three years ago, Oxford academic Dr Gavin Cameron said: "People are caught between a fear of being left behind and a fear of overstretching themselves."

He added that psychological factors such as regret at not investing earlier, even jealousy of others, played a part in sustaining the market. With the housing market fragmenting, it will perhaps be more difficult for speculators to accumulate.

Mervyn King made up a joke headline three years ago: "Think before you borrow, says boring banker."

His wise words still hold good.