Housing market comes back to life

London Briefing: It's official: the UK housing market has picked up. Contrary to all the doom and gloom about the likelihood of a property crash, the latest Bank of England inflation report treats the recovery as a matter of fact. It's not an opinion, nor is it a forecast: rising house prices are putting the consumer in a better mood and helped the economy stage something of a pick-up towards the end of last year.

Now, given all the headlines last week about the worst environment for retail sales since anyone could remember, it might come as something of a surprise to hear the normally cautious UK central bankers talk up the economy - and the consumer in particular. Indeed, the bank has come in for a bit of stick from plenty of commentators who think the economy is in poor shape and needs the help of a lot more interest rate cuts.

If the bank has given the official imprimatur to the housing story, there has been plenty of anecdotal evidence to back it up. The latest in a long line of numbers suggesting the market has come back to life are some remarkable statistics from Rightmove, a property website. Now, all such data sources come with a health warning: most people who compile house price data usually have a vested interest in talking the market up. Nevertheless, even if Rightmove's numbers are only roughly accurate, they tell a compelling story.

According to Rightmove, asking prices for homes in the month to mid-February rose by 2.7 per cent, after a much more modest rise of 0.1 per cent in the previous period. Many analysts have been forecasting that we will be lucky to see a near 3 per cent rise for 2006 as a whole, let alone just for one month. Rightmove's survey saw all regions report a rise, the first time this has happened in nearly two years.

In central London - where UK property market turns always start - there was an almost incredible rise of 9.4 per cent in the City of Westminster. This sharp jump probably says as much about the size of City bonuses as it does about the underlying strength of the property market.

In trying to guess where the next move in UK interest rates is going to come from, it is right to look at all of these short-term factors but, sadly, impossible to reach much of a conclusion. With different indicators pointing in opposite directions, we find ourselves in familiar territory and could reach any conclusion. The best clue for the next move in base rates comes from one of the more sensible members of the monetary policy committee (MPC), Steve Nickel.

Nickel has been a rather solitary figure of late, voting for a rate cut at each of the last two MPC meetings. A reading of his rather dry, but mercifully jargon-free, speeches is a study in clear thinking. He argues that there is some spare capacity in the UK economy; demand is most unlikely to accelerate beyond the growth rate in the supply side of the economy; and the effects of high oil prices on inflation are now fading. Hence, interest rates can be safely cut.

My own suspicion is that the majority of the MPC agrees with him but is waiting for a bit more data to make sure that past energy price hikes are not feeding through into wages.

The rebound in the housing market will have unnerved them and they will be careful not to ignite another boom. To this end they will be hoping that the February Rightmove figures are aberrant.

The pragmatic and straightforward approach of MPC members like Nickel has helped the bank to acquire a formidable reputation in the markets. The contrast with the ECB becomes more stark by the day. Clarity and pragmatism are not words normally associated with bankers in Frankfurt.

While the MPC will be keeping one eye on the bounce in the housing market, the ECB seem to be transfixed by signs of rising prices in one or two suburbs of Toulouse. Interest rates will probably fall in the UK in spite of firmer house prices. Interest rates in Europe look set to rise because of higher house prices.

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