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Can recent residential market strength be sustained? House prices are up 8% since February, according to Nationwide, and surveyors expect further price rises according to the RICS. Housing starts have increased sharply and housebuilders are buying land again.

On the other hand, the UK economy is just out of recession, unemployment is set to rise for some time and economic growth will be limited by lending constraints. The Savills view of house prices is that we are in the middle of a W, or perhaps a saw tooth stage of the cycle, with sustained market recovery unlikely until 2011/12. We are not alone in that view. So how do we make sense of the recent firm market data?

The current market is largely a consequence of the way in which government has intervened to prevent a collapse of the financial system. Lower base rates and quantitative easing have reduced mortgage rates and improved the affordability of housing, at least for the equity-rich who can obtain a mortgage. Low interest rates to savers on their deposits mean that the opportunity cost of capital for cash buyers is low.

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