The snag is that, in the absence of a healthy banking system, government intervention would single-handedly be responsible for any improvement. That raises the prospect of a longer-term correction when the government removes the crutches of low interest rates and discount bank funding, equity loans and mortgage guarantees. It's not an easy puzzle to resolve for property investors.
But first let's consider the prospects of an imminent recovery. Various leading indicators have shown radical improvement over the past few months. First, new buyer inquiries and newly agreed sales have leapt to their highest levels since the 2009 market bounce, as reported by members of the Royal Institute of Chartered Surveyors (RICS) in a monthly survey. Interestingly, the trend is particularly marked in the north of England, which has been the toughest market.
Second, data on new home registrations have also been strong. The Home Builders Federation last week announced that 4,000 people had already reserved a house through Help to Buy, the government's new equity-loan scheme, even though it was only launched in the March Budget. By comparison, it took nearly 18 months for FirstBuy, a predecessor scheme, to reach its target of 10,000 sales. Builders are ramping up their output after an extended hiatus, so that house construction is now increasing at its fastest rate for two years.
Admittedly, these positive signs have not yet been matched by hard data. April transaction figures from HM Revenue & Customs were disappointing, prolonging the flat trend of roughly 80,000 sales a month. Lending data have been scarcely more encouraging. Roughly 54,000 mortgages were approved for house purchase in April, according to the Bank of England - the same as the previous month. Gross mortgage lending has been rising slowly for the past two years, but net lending has hovered close to zero. In aggregate, banks are still funding new loans almost entirely out of repayments, suggesting that any increase in demand for credit may hit a brick wall of supply.
Yet an alternative explanation for the gap between sentiment and official data is timing. Sales just agreed will not feed into mortgage data for a month at least. Given the positive reports from recent surveys, it seems likely that data on loan approvals will start improving in June. "Application figures for April and May are most encouraging," says Nigel Stockton, head of financial services at Countrywide, Britain's largest mortgage broker.
Most industry executives attribute swelling demand to Funding for Lending (FLS). This Bank of England scheme gives banks an incentive to expand their books by linking cheap funding to business and mortgage lending. So far it has not sparked a pick-up in net lending, which was again negative for FLS participants in the first quarter. But it has led to a rapid reduction in mortgage rates, including at higher loan-to-value ratios. The cost of a 90 per cent mortgage has fallen by a full percentage point since the scheme's launch last July. This has brought homes within financial reach of a broader spread of UK households.
Help to Buy has further fanned the embers of recovery. In addition to providing equity loans for new homes, the scheme will from next year guarantee mortgages on second-hand properties - a much broader market. This has led to predictions of house price inflation that would have looked absurd before the Budget. Morgan Stanley is pencilling in capital growth of 8 per cent next year. It has also attracted wide-ranging criticism, including from Sir Mervyn King and the IMF.
As I wrote back in March, one complaint about Help to Buy is that it will fuel a house-price boom and thereby undermine access to housing - the opposite of what it set out to achieve. Other criticisms focus on the risk to the government balance sheet (the US precedent of Fannie Mae is alarming), the timing (FLS was just beginning to bear fruit) and the application of a single policy to a bipolar market. "Parts of the market that don't need it, ie London, will benefit," frets Simon Rubinsohn, chief economist for RICS.
But, for investors, the big problem with all these measures is that they are explicitly temporary. FLS is due to be cancelled at the end of 2014, while Help to Buy is supposed to last three years. "It's easy to imagine a perfect storm of government schemes ending and rising interest rates," says Peter Williams of index provider Acadametrics.
The stock markets are currently offering investors a foretaste of what happens when cheap money is withdrawn from the system. The UK real-estate investment trust sector has fallen 7 per cent since Federal Reserve chairman Ben Bernanke hinted last month that the US quantitative easing programme could be scaled back. Will property markets prove similarly flaky? My bet is that it depends whether the banking sector has moved out of intensive care by 2016. Sound banking, not ad hoc government initiatives, is the key to a sustainable housing recovery.
