Jeremy Warner: House price correction is not over yet

Outlook One swallow does not a summer make, and although there has been quite a lot of positive data on the housing market of late, it would be unwise to read too much into yesterday's unexpectedly strong Halifax house price survey.

As Halifax points out, there were several positive months during the last housing downturn of the early 1990s. This one too is likely to prove a temporary blip. Housing transactions remain at exceptionally depressed levels, making the sampling data small and unreliable. Mortgage approvals were down 22 per cent year on year in the latest Bank of England figures. What's more, there is a shortage in supply of the sort of desirable properties that cash buyers are after. Many potential sellers will wait until prices recover before putting their houses on the market. Those that do come on the market, particularly in the posher areas of London, continue to be highly sought after, so much so that there has been an unwelcome return of the practice of gazumping for some of the more expensive properties.

Where there is no shortage of supply and prices are still falling precipitously, such as new build and in economically depressed areas of the country, there are very few transactions, so these areas of the market have little impact on the survey data.

With unemployment set to continue rising strongly for at least the next year, together with increased levels of repossession, it is quite hard to see a sustained, nationwide recovery in house prices being established any time soon. Historically, employment has been a big factor in determining house price trends. It would be unusual, to put it mildly, for house prices to rise while unemployment is growing.

You need a big deposit to get a mortgage these days, yet the nominal cost of a mortgage has never been lower, making housing very affordable. Also on the positive side, as long as deposit rates are as low as they are, property looks as good a use of your money as any. Yet rates are eventually going to start rising again, and with them the costs of servicing a loan.

The most reliable yardstick for judging house prices has always been their relationship with average earnings. The long-run average is about four times earnings. During the boom, this ratio rose to unsustainably high levels. Yet the fall in house prices so far, combined with continued growth in average earnings in the meantime, has since returned the ratio to pretty close to trend.

This doesn't necessarily mean house prices are about to bottom out. All markets tend to overshoot on the upside, and undershoot on the downside. Housing is little different. During the last downturn there was a very considerable overshoot, when the ratio fell to substantially below its long-run average, before prices bottomed. I'm sticking with the view that house prices will fall at least 30 per cent peak to trough. So far we have had only 22 per cent.