People's confidence in the housing market has increased slightly over the last three months, as the gloom homeowners experienced during the gulf war fades in the early summer sunshine. This is the consumer view as seen in a survey conducted by the Woolwich, the UK's fourth largest mortgage lender.

However, this slight rise in confidence in May, could well mask a forthcoming decline in house price inflation. People's optimism, which has been buoyed by the ending of the conflict in the Middle East and the traditional boost spring in the housing market will subside, says the Woolwich and then the underlying weaknesses that has already seen house price growth begin to decline, will become more apparent.

Underlying weakness halting house price growth

Despite a slight rise in confidence it is difficult to get away from the economic fundamentals that point to a slowdown from the heady rates of house price inflation experienced recently. Indeed, against the current backdrop of slowing earnings growth, lower bonus payments, and higher household taxes, an increasing number of people will find that they simply cannot afford to chase house prices any higher.

And, if May's rise in unemployment were to mark the beginning of an upward trend over a sustained number of months, then individuals' outlook for their employment prospects would further contribute to a downward influence on house price inflation.

Andy Gray, head of mortgages for The Woolwich, comments:

"A slight upturn in confidence is unsurprising, and reflects the fact that jitters surrounding recent geopolitical uncertainty, particularly emanating from the Middle East, have now subsided. More importantly people are more upbeat because the spring period traditionally heralds a pick-up in activity in the housing market.”

“But, when you take these factors out, it is difficult to get away from the fact that double digit house price growth is unsustainable and over the coming months this will have a moderating influence on people's expectation that the value of their home will continue to rise."

Mortgage lending

UK Gross Mortgage lending has increased from £20bn in April to an estimated £22.7bn for May, which marks an increase of 13 per cent. Overall mortgage lending continues to remain strong as remortgaging continues to drive the mortgage market. (Gross mortgage lending was up 16 per cent year on year from £19.5bn in May 2002 to £22.7bn for May 2003).

The Woolwich expect lending volumes to remain high year on year as people continue to remortgage to historically low and competitive interest rates.