This month has seen several conflicting reports on the state of the housing market - so will the gloom continue or are we at the start of an upturn?

Some reports have pointed to recent residential market strength, but can it 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.

On the supply side of the second-hand residential market, the bail out of the banks and the asset protection scheme have, together with low interest rates, stemmed the flow of distressed assets to the market and limited the number of repossessions. This has probably had a more powerful effect than the government schemes to limit repossessions

In summary, this is a very low supply market, with few forced sellers. Strong demand from cash buyers and the equity-rich is greater than this low supply, so prices have risen. The gap between demand and supply has generally been more than wide enough for the limited supply of new homes to be absorbed comfortably, at prices in line with the local second hand market. However, any attempt to push up the price of new homes that are selling well is constrained by mortgage valuations, as these tend to be based on the second hand market.

Impact of increase in housing supply

Any increase in supply from vendors choosing to take advantage of the stronger market will quickly balance this market. The most telling finding from the most recent RICS survey is that supply has increased for two consecutive months, with the result that levels of unsold stock have started to edge upwards.

Looking further ahead, we are a long way from a fully functioning market, in which levels of realisable demand are sufficient to absorb normal levels of supply, including the numbers of new homes that are required to ease long-term affordability pressures.

To put this in context, mortgage approvals are off the floor, up to around 50,000 per month compared with a low point of 30,000. The larger banks have been at the forefront of this lending, but smaller banks and building societies are still constrained by their balance sheets and levels of savers’ deposits. The specialist lenders are out of the market for the foreseeable future, taking out capacity for 25,000 approvals per month.

The government’s Homebuy scheme helps to widen the availability of mortgages, as do other shared ownership and shared equity schemes, but the numbers remain small in the wider market context and there will be room for more private sector equity investment here.

The housing market will be back to a fully functioning state once mortgage approvals exceed 75,000 to 80,000 per month. It is difficult to see this happening before 2011/12. By then, households will have had time to pay down debt and fears of unemployment will have receded. These are the ingredients of sustained house price growth at normal levels of turnover.

Jim Ward is head of residential research at Savills