It is time to start worrying about house prices again. The recovery in the property market over the past year makes little sense and could soon go into reverse again. Mortgage lending fell by a third in January and all objective measures suggest that housing remains thoroughly overvalued. A double-dip in the property market is one of the greatest risks facing British consumers, investors and the banking system. The downturns of the early 1990s and mid-1970s triggered dramatic property slumps. Real house prices fell 30 per cent and it took four years before they started recovering again, according to Lombard Street Research. This time around, inflation-adjusted prices bottomed out only 17 per cent below peak and begun rising after just 18 months.
This dramatic recovery - a "dead-cat bounce" - caught most economists by surprise. In many ways, this prompt housing recovery is a great thing: it has helped bolster consumer confidence, reduced the numbers of individuals facing bankruptcy and helped cushion the banking system from greater losses.
But it also means that our steeply over-valued market has not really readjusted, for two reasons. For those aged 25-49 - peak mortgage years - unemployment has risen to only 6.3 per cent, compared with peaks of 9-10 per cent in previous cycles. Rate cuts have also helped.
Only 12 per cent of households faced housing payment problems last year, against 20 per cent in 1991.
No asset can remain overvalued for ever. At best, house prices will stagnate for years, with inflation and higher wages eventually bringing valuations back into line with fundamentals without an actual crash. But it is equally possible that the market will suffer from outright falls again when rates start to go up. Just don't expect the mini-boom of recent months to continue.