Mortgage lending sees annual growth

But economists warn signs of recovery are fragile and slump may not be over

Mortgage lending has shown its first annual growth for more than two years and house prices are on the rise thanks to low interest rates and increasing economic confidence.

But economists warn against unbridled optimism and predict a slow and fitful recovery.

The number of loans to buy property rose by nearly a quarter from June to July to reach a total of 56,000, some 19 per cent more than July 2008 and the first annual rise since early 2007, the Council of Mortgage Lenders (CML) said yesterday. The total value of the loans – at £7.5bn – was 27 per cent higher than the previous month but just 6 per cent higher than the previous year.

But the improvements are fragile, the organisation warns. Paul Samter, the chief economist, said: "It's tempting to call the turn in the mortgage market, and there is certainly concrete evidence that lending for house purchase is increasing. But the overall picture is likely to stay relatively subdued for some time, especially as the wider economy is far from robust as yet."

The lending industry's capacity to fund loans is still constrained, and consumers are showing little appetite for re-mortgaging, says the CML. Despite the strong growth in the number of mortgages for buyers, the re-mortgaging market remains weak. The number of people re-mortgaging rose by a fifth in July, compared with June, but was still a massive 53 per cent down on July 2008. And the total value of re-mortgages is still some 61 per cent down on last year at £4.7bn.

Nonetheless the upbeat implication is corroborated from elsewhere in the market. A growing number of chartered surveyors are reporting a rise in property prices, according to the latest Royal Institution of Chartered Surveyors (Rics) poll, published today. Like the CML data, the Rics survey also showed its strongest positive result since May 2007, as the net balance of surveyors seeing prices rise rather than fall reached 10.7 per cent in August, from minus 5.7 per cent. The trickle of positive news from the housing market in recent weeks also appears to be encouraging more sellers to put their properties up for sale. The average number of unsold properties on surveyors' books has gone up from 61 to 63, and the sales-to-stock ratio now stands at 27 – the highest level since January 2008 – after eight consecutive months of growth.

But the Ricswas careful to advise people not to expect an uninterrupted recovery, not least because particularly strong price rises are reported in London and the South East, adding weight to suggestions that housing shortages in a small number of densely populated regions may be skewing national averages. Jeremy Leaf, at the Rics, said: "Although it is clear that house prices are now rising, it continues to be the lack of supply that is underpinning the recovery in most parts of the country."

The mortgage growth numbers are also less striking, given they are compared with last year's depressed levels. And the tricky economic conditions – including tight credit and rising unemployment – could push house prices back down over the coming months. Howard Archer, the chief economist at IHS Global Insight, said: "Even now mortgage approvals are relatively low compared to long-term norms, and while house prices may well firm further in the near term we continue to have doubts about the longer-term strength of the housing market."

On Monday, the Ernst & Young Item Club warned that property values may not return to their 2007 peak for at least another five years.