Is the housing market there yet?

Positive house price growth and a pickup in market activity in the past few months has generated lots of excitement but begs the question: how long it will be before things get back to some sort of normality?

The short answer is: not soon. The market has been in its biggest slump since the 1990s and, five years in, prices are still about 10 per cent below their peak in nominal terms (25 per cent if we take inflation into account). In the 1990s it took nine and a half years for prices to recover to pre-recession levels. It may not take quite so long this time, but it might.

House prices began to rise towards the end of last year and have continued to do so in 2013. They would need to rise at an average of 4 per cent a year from now to recover more quickly than in the 1990s. That is not unachievable – prices rose 6 per cent in 2010 – but it is not a certainty, especially given the fragile state of the economy.

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House prices do not tell the whole story and on their own are not a signal of a healthy market. Rather they can be symptomatic of distortions such as a lack of supply. The level of market activity conveys much more information about the true state of the underlying market. Comparing this cycle with the 1990s, the collapse in transactions this time was much more severe and has hardly recovered since the crash.

Total housing market transactions in 2012 were 43 per cent lower than in 2007, according to the latest data from HM Revenue & Customs. Interestingly, transactions in higher price brackets have been much more resilient. Activity in property priced between £500,000 and £2m was about 30 per cent lower while those costing more than £2m were just 18 per cent lower.

This split between activity in the mainstream and the higher-priced sector of the market tells us a lot about what has held things back, and also where it might go in future. First, the lack of finance has been a bigger hindrance to the mainstream sectors of the market. Those active in the higher price brackets have more equity to play with, despite house price falls.

Second, those in the prime sectors of the market have higher levels of wealth and will have been less affected by the economy’s poor performance. Even though they have been hit proportionately harder by tax measures, the wealthiest are still less constrained by austerity.

Furthermore, a significant proportion of buyers in the prime central London markets have come from overseas, attracted toLondon as a safe haven for investment, and that is likely to continue. Data shows that interest from overseas is up by a third on last year, even before news on weakening economic conditions in China and a resurgence of issues with eurozone government debt.