Two weeks ago, a house came up for sale in Stockbridge, a fashionable area of Edinburgh. It was listed as “offers over £795,000”. After frenzied viewings and a day of sealed bids, it sold for not far off £1m. That won’t surprise the new army of housing bulls. Given the recent housing market data, they will say it was only to be expected.

Last week, the National Association of Estate Agents (NAEA) told us that, in April, each agent agreed 10 sales, up from five last August. Rightmove’s monthly survey reported that asking prices have risen slightly. Mortgage brokers John Charcol noted that first-time buyers accounted for 25 per cent of the mortgage market in the first three months of this year, up from 6 per cent in December.

Then there’s the improving mortgage market. In the past month, Lloyds, Abbey and Co-operative Bank have all launched first-time buyer products.

Finally, there are the yield numbers: when I was working on the BBC’s Property Watch last week, investor after investor paraded through the studios boasting about net yields of 6 per cent or so on their portfolios – double the yield on a good savings account.

But most of these signs can be dismissed pretty easily. The NAEA numbers? What they don’t seem to acknowledge, says property pundit Henry Pryor, is that around 3,000 agents have gone bust since the crash started. “Might it actually be that the apparent rise is just dividing the usual small number of sales by a much smaller number of estate agents?” he asks.

As for new mortgage products, they aren’t making much difference yet. The Council of Mortgage Lenders’ (CML) latest figures for April show gross mortgage lending 9 per cent down on March and 60 per cent down on April 2008. The fact is, whatever the lenders say in public, they still don’t want to lend.

On to yield. While 6 per cent sounds nice, it’s not enough to compensate for the risks. The most obvious one is that UK house prices keep falling. But beyond that is the risk that rents will keep falling (as they have been for some time) and that interest rates will start rising (the consensus among the clever is that inflation will be back in a big way by 2011). It might not be long before 6 per cent turns to 2 per cent, at which point the nation’s overenthusiastic buy-to-let investors might wish they’d left their money in that safe savings account.

The real point is that houses are still too expensive. The average house price is now around £150,000 and the average salary around £25,000. That makes the price to income ratio a whopping six times.

Prices only got so high in the first place because of easy access to credit – people were able to borrow five, six or even seven times their incomes, and they did. Now that the credit market has tightened, the money to buy overpriced houses just isn’t there any more. Note that, according to the CML, the average loan to value ratio at the moment is 75 per cent, making the average deposit more than £37,000.

The result? There is still no way the average person can afford to buy the average house. So prices will keep falling until they can. How far is that? Four times average income would be higher than historical averages but reasonable. Assuming that average wages don’t fall from here (although they easily could), that would make the average house price £100,000 – 33 per cent lower than it is now.

Worse, it might not stop there. Markets tend to overshoot and the UK property market has never proved an exception. As the analysts at Shore Capital say: “The more acute the house price boom, the more painful the correction.”

So if houses are still too expensive and credit still too tight, why the optimism? Buyers are getting bored of waiting. When they start moving into the market, there is bound to be a price bounce. And overstretched sellers have been rescued by low interest rates. That won’t last, and nor will the bounce. It’s still a market to sell into, not buy into.

Merryn Somerset Webb is editor of Money Week and previously worked as a stockbroker. The views expressed are personal.

merryn@ft.com

Richard Donnell: The bullish case for property - May 22 2009