Outlook: Panto-time among mortgage lenders

It becomes a bit of a pantomime when forecasters agree about the future yet disagree about the past. However, that seems to be the topsy-turvy way of the housing market. House price rises have been very modest this year, says Halifax. Oh no they haven't, retorts Nationwide. Both close ranks to agree that price rises will be modest in 1998. Either there was no boom, or if there was it was short-lived, and the housing market will be restored to steady, sustainable growth.

As in panto, we should all probably be highly suspicious of this traditional happy ending. The lenders are fed up with being portrayed as the villains behind a volatile market that in the past has exaggerated the ups and downs of the wider economy. They want to recast themselves as fairy godmothers presiding over an orderly housing market. Unanimity in the mortgage industry about prospects for a steady recovery, an end to boom and bust, is therefore a very predictable one.

They might well be right about next year. Past and future mortgage rate rises, declining consumer confidence and an increased supply of new homes coming on to the market should all contribute to a slower rate of house price inflation. At the same time, there is enough momentum in the recovery after the dark days of the early 1990s to keep the number of home sales and house prices at a healthy level.

But the underlying structure of the housing market has not changed. The supply of land and homes is relatively fixed, while long-run demographic changes mean demand is likely to continue to grow strongly. This adds up to increases in real house prices over the long term, with sharp fluctuations in the short term because demand can adjust much faster than supply over the course of a business cycle. The fact that inflation is lower than it used to be, or that some people still bear the scars of the late 1980s boom and subsequent bust, does not alter the analysis.

The only question is whether the shift to a low-inflation background will reduce the scale of the ups and downs in house price inflation. The answer depends crucially on the experience of the latest economic cycle, the first low-inflation recovery since the 1960s. In other words, it depends on what did happen to house prices last year. As any panto-goer would warn, you need to look behind you. Too bad Halifax and Nationwide can not agree what's there.