Negative equity set to pass into housing history

The homes market bounces back: Positive indicators bring return of the feelgood factor - and that bugbear of the Eighties, gazumping - but regional variations cast shadow over analysts' forecast of steady and sustained appreciation

If there is a single symbol of how badly the economy went wrong after the last boom, and how well it is going now, it is the housing market.

The Halifax Building Society reported recently that house prices have risen 5.2 per cent during the past 12 months. As recently as May, they were flat year-on-year.

Figures due today from banks and building societies are expected to show a further increase in mortgage demand. Perhaps most important, sales have increased sharply over the past three months.

Housing is important in the months before the election because the number of home owners with negative equity - properties worth less than their mortgage - is one of the key influences on voting intentions.

Latest estimates suggest that the number of homeowners affected - which increased sharply after the 1992 election with house prices dropping more than 15 per cent- has more than halved to below half a million this year. Negative equity could be history by next May.

The conventional wisdom is that house prices will continue to rise steadily without a return to boom conditions. The reasoning is that the bust is still too fresh in buyers' memories, so few will be willing to offer silly prices.

In addition, the signs that the pent-up demand from buyers is being released should be met with pent-up supply from people who have been unable to move for the past five years.

The argument that people have become sensible about house prices has been backed by Bank of England research. The Bank argues that in a low- inflation economy, house prices will fall from time to time, as they always vary more widely than the general price level. Knowing the risk of falling prices, speculative booms will be less likely.

It is therefore bad news for the sensible homeowner that the favourite dinner-party conversation at the end of the 80s - tales of soaring prices and gazumping - has returned to haunt parts of London and the home counties.

David Miles, professor of economics at Imperial College, thinks this is a straw in the wind. House-price inflation could soar beyond the 5 to 7 per cent that most economists are forecasting. "You can't explain past frenzies unless you assume people do have very short memories," he says. "Once first-time buyers see that prices are definitely rising, they will come into the market and it will become a self-fulfilling boom."

Even if the late 1990s turn out to be a pale shadow of the late 1980s, house prices will almost certainly stay ahead of inflation. That is their long-run trend in a country where earnings increase and land is in fixed supply. And after the housing nightmare of the past five years, there is some catching up to do.

Leading article, page 19

Hamish McRae, page 21