Bank of England's pragmatism helps housing market pick-up

London Briefing/ Chris Johns: Whisper it quietly, but the UK housing market is showing signs of picking up. It's very early days yet and it would be wrong to read too much into a relatively short run of numbers, but things are looking better.

The truly remarkable aspect of all of this is that house prices did not crash, despite forecasts of an apocalypse from many learned commentators.

None of those doom merchants are admitting defeat, of course. The end of the world has merely been delayed. They may be right one day, but things are not looking too hot for the seers at, for example, the Economist magazine, who have been calling for a bursting of the UK house price "bubble" for years.

Contrary to all forecasts to the contrary, the Halifax house price index has risen by an average of 1 per cent per month over the past quarter. As ever with UK house price data, the numbers differ, depending on the various providers.

But the Nationwide house price series rose 1.3 per cent in October, following a small drop in September, adding to the impression that the market is stirring.

Inland Revenue data show that the actual number of properties sold during the third quarter rose by 16 per cent, compared to the three months ending in June.

Bank of England numbers suggest that mortgage approvals climbed in September to their highest level in over a year. In a similar vein, the Royal Institution of Chartered Surveyors has also reported increasing market activity.

What is going on?

It could be that the market is now so super-sensitive to interest rate changes that a mere quarter point of mortgage rates earlier in the summer was all that was needed to turn the market around.

While there is probably an element of truth to this, it can only be part of the explanation. Debt levels are at a record high, so small changes in interest rates do have a magnified effect, but I doubt if one small cut in rates can account for the recent evidence.

It would be wrong to think that suggestions of a pick-up mean that a new boom is in prospect. The property market is merely bouncing around and is trendless against a background of something close to a zero real rate of annualised price increases. Which is entirely a good thing.

It's what the Bank of England wanted to achieve, although even they have probably been surprised by how easy it was for them to let a little air out of the market.

The main reason why most forecasters expected - and still expect - a much worse outcome for property is that they believe prices to be massively overvalued. If you combine that observation with a view that the economy is likely to be very weak for some time, you have the lethal cocktail that will prompt an outright decline in house prices.

In fact, this argument is almost entirely circular. Most of that economic weakness stems from the forecast collapse in the property market. Without the latter, you are unlikely to get the former.

Foreign investors in UK equities seem to believe that whatever is wrong with the economy is unlikely to be severe or long-lasting.

Takeover activity in the stock market is exploding, prompting headlines about "UK plc" being up for sale. But the fact that so many foreign companies are voting with their wallets is surely a vote of confidence in the underlying UK economy.

The Bank of England is now widely expected to leave interest rates unchanged at this week's meeting of the monetary policy committee (MPC). In fact, market expectations are for unchanged rates for the foreseeable future, with one or more hints that the next move could actually be up by the end of next year. If true, a single cut in interest rates would make this the most shallow of interest rate cycles.

The MPC must be delighted. They are continuously favourably compared to their counterparts at the European Central Bank (ECB).

While Alan Greenspan is rightly being applauded for 17 years of superb monetary management, the first seven years of the Bank of England's independence have suggested that many leaves have been taken from the Greenspan book of flexibility.

Pragmatism and a willingness to respond quickly to unfolding developments have been hallmarks of the MPC's approach, something that Greenspan would applaud.

UK house buyers take a different view to the pundits. They have backed the ability of the Bank of England to manage things well, and they have been right to do so.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.