David Prosser: Blinded by housing's false dawn?

Outlook: Panic over? Nationwide Building Society says that after a fifth month running of property market inflation, house prices are now back at the level of a year ago. At this rate, we shall soon climb back to the highs of 2007.

Nationwide is no maverick: every single housing market indicator, including government data, published in the past few months suggest that prices are on the rise, clawing back the 20 per cent losses seen from peak to trough.

How, then, to square the recovery with the views of the International Monetary Fund, reported in this newspaper only yesterday? The IMF argued – on the basis of its observations about past property booms and busts around the world – that the UK market is more overvalued than any other country in Europe with the exception of Ireland. Fair value is 12 per cent below current levels, the IMF reckons.

Not that the IMF is always right. In the past two days alone it has cut its estimates of financial crisis banking losses by some $600bn and upgraded the forecasts for the world's leading economies, including that of the UK, that it made only six months ago. They're not always the most optimistic types.

Still, read beyond Nationwide's headline statistics and you'll find the country's biggest mortgage lender is nervous too. It points out that since the housing market took a dive, the number of transactions has halved. Prices seem to be rising because while demand for property has fallen, supply has dipped even more sharply.

That makes sense. In a falling market, only those who have to sell do so. What seems to have happened over the past year is that those people casually considering moving have stayed put, while many of those who had to move have not sold up before buying elsewhere, taking advantage of low interest rates and high demand for rental property.

Nationwide warns that this is only ever going to be a temporary effect. There is already some evidence that sellers are beginning to return to the market, so supply is increasing. If that goes on, Nationwide warns, prices could begin falling again.

Rising supply could, of course, be met by an increase in demand – that dynamic might prevent the market addressing the over-valuation identified by the IMF. But there aren't may reasons to be hopeful. With unemployment set to go on rising into 2010 and no respite in sight for buyers struggling to persuade mortgage providers to relax stricter lending criteria, where would more demand come from?

Jam today then for homeowners, but indigestion tomorrow. And if you think the IMF is gloomy, take a look at the work of Capital Economics. It puts the UK housing market's over-valuation at 20 per cent.