Housing recovery should pick up speed

Mortgage lending by high street banks and building societies increased last month after falling slightly in November and December. The latest figures suggest that the pressures driving house prices up for the past year are still present despite signs of a pause at the tail end of last year.

Predicting the outlook for the housing market this year is made difficult by the contradiction between wide anecdotal evidence of big price rises, gazumping and other late-Eighties types of experience and the statistics which show a stately pace of recovery.

House prices might have made a comeback as a hot topic of conversation at dinner parties, but the mortgage lenders are keen to emphasise that there is no danger of revisiting the excesses of the last boom. Adrian Coles, director-general of the Building Societies Association, said yesterday: "There is no boom going on. The market is much patchier than it was in the 1980s.

"Although the recovery is now well established, it is progressing at a more moderate pace than some commentators were predicting."

Both remarks find support in recent evidence. Yesterday's figures showed a small monthly increase in new loans by building societies to just over pounds 1.2bn, a level 29 per cent higher than a year earlier. Banks' mortgage lending climbed to pounds 771m, 47 per cent higher than their lending last January.

A small decline in the amount of new loans approved but not yet made by building societies cast a slight shadow over these robust figures, however. Some analysts suggested that uncertainty about interest rates in the run-up to the general election could be holding back demand.

So far the recovery in house prices has been heavily weighted towards London, the South-east and Northern Ireland. The annual rate of increase of nearly 15 per cent in Greater London at the end of last year was twice the national average. Both Halifax and Nationwide reported a small drop in house prices in January, but the most buoyant regions bucked the trend.

Many economists argue that the housing slump during the first half of the 1990s left psychological scars, while low inflation also makes property a less attractive investment. They reckon this means there is no danger of anything more than a steady recovery with pockets of excess.

Others think this overlooks the fundamental economics of the housing market.

David Miles, professor of economics at Imperial College, London, said: "House prices are about 20 per cent undervalued compared to their long- run trend."

With a fixed supply of land and rising costs of housebuilding combined with demographic pressure for more homes, over long periods house prices have grown at about the same pace as the economy as a whole.

Other indicators, such as the ratio of house prices to average earnings, suggest that prices remain low even after last year's 7.4 per cent average increase.

Professor Miles predicted that prices could rise more sharply this year than last. "The fact that they have started to rise means people who want to buy will try to do it quickly, whereas sellers will carry on holding off for a better price," he said.

This ties in with a recent survey of estate agents from the Royal Institution of Chartered Surveyors, which complained of the shortage of properties up for sale.

With consumer confidence at its highest since August 1988, unemployment falling, wage increases picking up and the prospect of more than pounds 22bn in handouts of free shares by building societies during the next 12 to 18 months, there must be a good chance of a more than moderate housing recovery.