LONDON BRIEFING:Prices in London are back to pre-Lehman Brothers levels – but can this trend continue?

RISING property prices are back on the agenda at dinner parties around the capital after two separate surveys revealed another rebound in the market last month.

Amid the chaos of the banking crisis, economists were warning that UK house prices could fall another 10 or even 20 per cent this year. Now, however, it looks as though they may actually end the year ahead, and perhaps by as much as 10 per cent – bad news for first-time buyers (even if they could get a mortgage) but music to the ears of those already on the housing ladder.

The two most widely followed house price surveys – from Halifax and Nationwide – point to a sustained increase in residential property values in recent months. Figures from the Halifax yesterday put the average value of a home in Britain at £163,533 (€176,843). This is an increase of 1.6 per cent and is the third month in a row to show a rise, although prices remain well below the peaks reached in of 2007, when the figure hit £200,000.

Nationwide put average values at £161,816, a rise of 0.9 per cent and the fifth consecutive monthly advance. Prices in London, hardest hit by the financial crisis, have now recovered to their pre-Lehman Brothers levels. Over the past 12 months, average prices in the capital have risen from £263,739 to £268,847.

But just how solid is the recovery in the housing market? Let’s not forget that it is in the interests of mortgage lenders to talk up the market – and Halifax and Nationwide are two of the biggest in the business. Even they are cautioning against over-exuberance, however, warning that the upward trend is unlikely to continue.

The average dinner party guest doesn’t need a degree in economics to work out that when demand increases and supply shrinks, prices rise. And those are the forces that are currently at work in the British housing market – would-be sellers are holding on to their houses, if they can, until prices recover which means that too many buyers are chasing too few properties.

Turnover rate in the housing market tends to run at around 8 per cent; in other words, 8 per cent of houses in the private sector are bought and sold each year. At the bottom of the market in 2008, that figure slumped to just 3 per cent. It has since recovered to 4 per cent or so but that is still only half normal levels.

In such a shrunken market price movements become exaggerated, giving an entirely false impression of its underlying strength. Optimistic house price headlines are likely to encourage reluctant sellers to post the “for sale” sign, which would boost supply but could in turn see a rapid reversal of the recent price rises as supply and demand reach more of an equilibrium.

In the meantime, the recovery of the wider economy remains faltering at best. Industrial output figures for September, released yesterday, confounded economists by showing a sharp decline rather than a rise, casting doubt on whether Britain will be able to resume growth in the third quarter. The prospect of house prices ending 2009 higher than they were a year ago will be a comforting one for most homeowners. But it is too soon to call the recovery in the market, particularly given the toxic background of rising unemployment, continued lack of credit and the prospect of interest rate rises next year.

FROM next Monday, circulation of the

London Evening Standard

will soar from 250,000 copies a day to more than 600,000, a feat the 182-year-old newspaper will achieve by the radical move of turning itself into a freesheet.

Dropping the 50p cover price – at a cost of £250,000 a week – is a huge gamble by the paper's new Russian owner, Alexander Lebedev. Faced with the decline in readership of the Standard, London's only paid-for evening paper, Lebedev is betting that the lost circulation revenue will be more than made up in extra advertising. A paper with a 600,000-plus circulation will undoubtedly attract advertisers, even during the current slump, but it is by no means clear that they will value the giveaway Standardas highly as they did the paid-for paper. And, while free papers have proved popular with London commuters, there is a danger that the Standard's valuable AB readership will be alienated by the move. The Standardis a quality newspaper and it's certainly good news for commuters wanting something to read on the way home. But it is a high risk strategy – if it doesn't work, there's no chance the Standardwill be around to celebrate its 200th anniversary.

Fiona Walsh writes for the Guardian newspaper in London