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The credit crisis brought a combination of negative economic growth, rising unemployment and a severe contraction in residential mortgage lending. The UK housing market was left facing a three-way stand-off - buyers who couldn't buy, lenders who couldn't lend and builders who couldn't build.

One of the bigger surprises in 2009 was the scale of the recovery in the share prices of housebuilders. Shares in all the housebuilding companies in the FTSE 350 index, with the exception of Berkeley Holdings, ended 2009 higher than 2008.

Taylor Wimpey, which was formed by the merger of Taylor Woodrow and George Wimpey in 2007, was the stellar performer with an increase of 280 per cent. That said, as impressive as the rebound looks, Taylor Wimpey, like many of its peers, spent most of 2009 battling to survive.

The share price fell to 3p at the worst of the slump, down from a peak of nearly £4 in 2007, and ended the year at 39p. The recovery was helped by shareholders bailing out the sector which was on the verge of defaulting on loans, by digging deep to take part in equity fundraisings. In turn, the companies were forced to write down the value of their land banks and initiate large-scale cost-cutting programmes.

Although several players have announced positive trading updates recently, referring to increased site activity and reservation numbers, the prospects of a sustained recovery remain highly uncertain. Recent data from the Royal Institution of Chartered Surveyors revealed that the numbers of properties being sold was still a third lower than at the start of 2007. Margins in the sector are likely to remain under pressure as long as there is no improvement in mortgage availability, especially for the first-time borrower.

The prospect of rising unemployment due to a further weakening of the wider economy is still a key risk to a demand-led recovery.

Despite the modest increase in house prices in 2009, mainly driven by supply issues, the current price-to-earnings ratio (4.8) is still well above the historic average of less than four-times earnings. In short, it will be some time before a return to the heyday of 2007 when there were 151,000 completions in the private sector.

The state of the housing market will be a clear battle ground during an election year. The UK is on the verge of a housing crisis, driven by a large misalignment in supply and demand. This is particularly evident in the non-private sector: affordable and social housing.

Often the terms 'affordable' and 'social housing' are used in the same context. However, affordable housing focuses more on the provision of low-cost home ownership and includes schemes that help individuals get onto the property ladder, whilst 'social housing' has increasingly been associated with homes that are let to individuals or families on low or no income. The rent in the social housing sector is kept artificially low via government subsidies and is managed by housing associations.

There are currently 1.8m households on local authority waiting lists and this is set to rise to more than 2m by 2011. In London, the situation is more critical: one in 10 people are on a social housing waiting list and 750,000 are living in overcrowded conditions. There are nearly 80,000 homeless households living in temporary accommodation in England. A shortfall of 1m homes by 2010 means that the crisis is only going to get more acute.

The pressure on demand for new housing is coming from several fronts. The UK population is set to rise by 10m between 2007 and 2031. This number does not include the rise in population via net immigration which is forecast to be 237,000 a year. The key driver in demand is coming from the 50 per cent increase in the number of one person households over the last three decades. The end result is an ever increasing waiting list for housing.

The main challenge facing current and future governments is that there is a huge imbalance between the demand for, and supply of new-build homes. The current government set a target of 240,000 homes per year by 2016, making a total of 3m homes by 2020. However, these targets have proved to be overly optimistic. The severe contraction in credit markets has made the first-time buyer almost an endangered species. This in turn has led to fewer sales of new homes, which has ensured that most major housebuilders in the UK are in the red, severely limiting their ability to build more homes. In fact in 2008, only around 100,000 new homes were built, the lowest level since 1945. This, in turn, has created a huge misalignment in terms of supply and demand.

Identifying profitable investment opportunities within the housebuilding sector is going to be very difficult, given the long-term nature of the difficulties faced by housebuilders, ranging from very weak balance sheets, contracting cash flow and the writing down of land bank values. The biggest investment opportunity within the housing sector, we feel, lies not in the bricks and mortar itself but in its maintenance. The provision of maintenance services within the social housing sector is backed by secure long term government finances.

In 1997, the UK government launched the decent homes scheme to tackle the £19bn repairs backlog in the social housing sector. The definition of a decent home was one that has reasonably modern facilities and is warm and weatherproof. However, as we approach the 2010 deadline, 8.1m homes in England still fail to meet this standard. Social housing requires higher levels of regulation compliance than private residences and building maintenance companies have managed to garner a lion’s share in servicing this sector. This doesn’t just apply to local authority needs, but also increasingly the housing associations that are responsible for the majority of social housing in the UK.

There are nearly 700,000 empty homes in England, with the vast majority being privately owned. The government has to adopt measures to bring these properties back into use as part of the strategy to mitigate the current housing crisis. These measures will involve the expertise of building maintenance companies who can provide a one-stop shop service.

The affordable and social housing sector offers defensive growth, with long-term cash flow visibility, all of which is underwritten via central government spending. The market within social housing is estimated to be worth around £11bn annually.

The fragmented nature of the sector, with no single company having a market share over 3 per cent coupled with the very long-term contracts support the case for long-term investing.

The larger, well-established companies such as Mears and Connaught have robust balance sheets, with low debt levels which are amply serviced by revenues derived in the main from the UK government’s coffers. The end result is a sector that offers clear visibility in earnings growth and profitability late into the current decade.

Ketan Patel is a socially responsible investment analyst at Ecclesiastical