Hope on the horizon - yet again

Homes are more affordable than they have been for 20 years and the outlook for interest rates is bright. Here and on pages 18 to 19

LENDERS and mortgage brokers report an encouraging start to the year, with the number of loan applications running well ahead of expected levels. Is this, finally, the start of a renaissance in the housing market?

The housing market has seen numerous false recoveries since it overboiled in the late 1980s. It has become almost an annual ritual for the Halifax Building Society and other leading commentators to start each year with a modestly optimistic forecast for house prices - only to be eventually disappointed with yet another modest decline. Apart from exposing the finger-in-the-air nature of some of this forecasting, the experience has discouraged building societies from making any bold predictions. The consensus this year is that average prices will edge up by about 2 per cent.

Few homebuyers still expect to make an easy tax-free profit from their properties. And so long as house prices in some areas continue to slip, many people will also be discouraged from moving into ownership for fear of being trapped by negative equity.

The fierce competition between lenders, much of it aimed at encouraging existing borrowers to remortgage, has brought out a wide range of attractive fixed-rate and discounted-rate loans. Borrowers can opt to reduce their mortgage costs and control risks over any period from one to 10 years. Various add-ons are also available, such as cashback offers to help cover the cost of moving home or remortgaging. Lenders have cut profit margins to the bone.

"The quality of offers being made to new borrowers is unparalleled," says Ian Darby, marketing director of leading mortgage broker John Charcol.

Mr Darby sees new grounds for optimism about the market this year. He believes the pounds 15bn or more about to be released from Tax-Exempt Special Savings Accounts (Tessas) will act as a useful lubricant. This money, plus the windfalls promised from building societies converting to banks, may encourage some people to move home.

The outlook for interest rates is also much more favourable. It is easy to forget that a year ago many economists feared that base rates were set to rise to around 10 per cent. This year, with continuing low inflation and an approaching General Election, any movement is likely to be downward. Chancellor Kenneth Clarke has already trimmed rates by 0.25 per cent twice in the past two months.

At the same time, houses are more affordable than at any time in the past 20 years, thanks to a combination of falling prices and rising incomes. But this is not necessarily good news for sellers. Many first-time buyers can now afford to leap-frog traditional first-time homes. This has reduced demand for studio flats in London and small terraced houses in other cities.

Probably the biggest single brake on the housing market has been people's fear of losing their jobs. But Jim Chadwick, marketing director of Barclays Mortgages, believes would-be homeowners are starting to come to terms with reduced job security. "We've seen that people don't have to do something awful to lose their job, they just have to be in the wrong place at the wrong time. People are starting to say, 'It's not going to change, we might as well go ahead with our plans.' "

Lenders, too, are learning to respond to customers' lifestyle needs. Abbey National has experimented with a loan that allows the borrower to avoid making a payment in December, when the cost of Christmas is looming large. Several lenders are already offering a "baby break" mortgage, which allows borrowers to take an interest holiday if they have a child. Ambrose McGinn, Abbey National marketing director, says the major lenders will increasingly turn to such innovative schemes to try to get away from the cut-throat competition based purely on the mortgage interest rate.

When the market does turn, it may turn quickly - not with the gradual upward drift suggested by the current modest forecasts. The Halifax estimates that there may be pent-up demand from half a million or more would-be homebuyers who have deferred a house purchase because of the problems of the past few years.

But at the same time, the supply of houses is potentially much more elastic, because a lot of previously unsellable property has been rented out.