House prices have been remarkably resilient so far this year, despite a recessionary economic background with sharply rising unemployment. Although this has come as a surprise, Nationwide’s Chief Economist, Martin Gahbauer explains, that it is not inconsistent with other economic indicators and asset prices, which have also bounced back somewhat after severe declines around the turn of the year. “In the specific case of the housing market, the very sharp decline in transactions over the course of 2008 produced a fairly large pool of prospective purchasers who were ready and able to buy in principle, but did not want to do so in the very uncertain conditions prevailing when the banking crisis was at its peak last autumn. When it became clear that Government interventions around the globe had stabilised the banking system and prevented a worst-case economic outcome, some of this pent-up demand re-entered the market, with the added assistance of very low interest rates. Although the resulting rise in transactions has not been that dramatic, it has been enough to produce an upward bounce in prices because it coincided with very low levels of supply on the market.”

The lack of supply in the market is indicative of a wider problem.

The assumption of the Department of Communities and Local Government is that long term net migration will be 171,500 per year, resulting in an annual increase in the number of households in England of 252,000 once other factors are taken into account. Even if one were to assume zero net migration, however, the number of households is still projected to expand by an average of 153,000 units per year through to 2031. Whatever the true number is, it is almost certain that current levels of housing construction have fallen far below future levels of household formation. Based on recent levels of housing starts, it looks likely that only around 100,000 homes will be built during 2009, which would represent by far the lowest level on record. As it is likely to take time for the economy and housing construction to recover to pre-crisis levels, the potential exists for a considerable housing shortfall to develop over the next few years. This would be on top of the shortfall that already started to develop in 2004, when even boom-time levels of construction failed to keep pace with household growth.

A range of demographic factors have been cited as factors contributing to this, such as increasing life expectancy and more divorces. Couple this, with the inability of the construction industry to keep abreast with demand; at present more than eight out of ten construction firms report skill shortages. Many developers also cite the complex planning laws as a deterrent; refusals for planning permissions in major housing developments increased from just 15% in 1996-1999 to 25% in 2002.

Social housing waiting lists have rocketed by 55% over the last five years, but new research by the National Housing Federation suggests that rising unemployment and repossessions will cause the number of households on waiting lists to jump from 1.77m in 2008 to a record high of around two million in 2011 – a rise of some 200,000 homes in just three years.

The newly formed 2020 Group of building bodies, councils and unions, say that providing new housing will meet an "urgent" demand, and help to maintain construction industry jobs. The 2020 Group, formed by the National Housing Federation (NHF), the housing charity Shelter, the Local Government Association (LGA) and the Trades Union Congress (TUC), estimates that there will be 450,000 job losses in the construction industry between 2008 and 2010. It advocates spending some £6bn in order to stimulate the market, attempt to meet the Government’s own housing targets and safeguard jobs in the construction industry. Group chairwoman Kate Barker, a member of the Bank of England's Monetary Policy Committee, said house building offered "excellent value in terms of sustaining economic activity" and was "urgently needed".

The 2020 Group says its recommendations would save 30,000 jobs in the industry, as well as thousands which support the industry, including in building materials, furniture and white goods. This would preserve construction jobs and apprenticeships which would help prevent a loss of key skills. Investment on this scale would enable house builders to continue to invest in housing supply, reduce the risk of a housing supply shortage once the economy recovers, improve cash-flow and reduce risk for developers and suppliers currently experiencing severe financial pressure and increase labour market mobility by providing more affordable and social housing. They also argue that Government would profit from the investment as the creation of jobs would lead to increased revenue from taxation.

To provide this short-term increase in supply, there must be additional funding for social housing investment. If featured as part of an economic stimulus, it would drain the flooded social housing waiting lists, as well as preserving the ongoing capacity of the construction sector, reducing the predicted loss of construction industry jobs and improving the ability of the industry to deliver quickly once economic conditions improve.

The Government has already committed to a number of large public infrastructure projects such as Cross-rail and have bought forward funding for the Building Schools for the Future project. Yet this could be taken further, with direct investment in infrastructure development that would both support capacity within the construction industry and enable the delivery of new housing. This infrastructure investment would include both transport links and the public facilities needed to support new housing projects. Priority should also be given to existing and new regeneration projects, where the changes in the market have rendered their development unviable. Additional finance to stalled projects will preserve and create employment opportunities, whilst also addressing long-term housing needs. There must be public sector investment in infrastructure projects in order to protect jobs in the industry.

The latest estimates of inflation from the Bank of England give rise to the possibility of a temporary fall below one percent, amid a recession that has grown deeper than its Monetary Policy Committee (MPC) expected. Mervyn King, the Governor of the Bank of England, said that it “is more likely than not that later this year I will need to write a letter to the Chancellor to explain why inflation has fallen more than one percentage point below the target [of 2 per cent]”.

Last month, the Bank said that inflation fell to an annual rate of 1.8 per cent in June, from 2.2 per cent in May, reaching its lowest level since September 2007. Inflation could stay below 2 per cent until at least the end of 2012. The Governor opined that the UK economy remained firmly in the grasp of an enduring downturn. Mr King said: “The recession appears to be deeper than the MPC thought likely at the time of the May report ...nominal indicators remain weak and the adjustment of balance sheets has a long way to run.”

The British Chambers of Commerce recently revealed a sharp upturn in business confidence, amidst signs that other indicators, particularly within the Manufacturing and Services sector are improving. Mr King continued, “There are more encouraging signs looking ahead. Confidence has recovered somewhat from its collapse last autumn and strains in the financial system have eased. It is likely that output stabilised in the middle of this year, and business surveys and other short-run indicators suggest that growth is more likely than not to resume over the next few quarters.”

The Bank of England confirmed that any interest rate rises would likely be postponed until the second quarter of 2010 at the earliest.

Last week, a £50bn extension of the quantitative easing programme was announced in response to the inflation projections, which suggested a protracted period of below-target inflation. The Bank’s forecast suggests that keeping the benchmark interest rate at 0.5 per cent until at least the end of 2012 would see inflation approach 2 per cent by the end of the period. However, raising the rate above 1 per cent in the second quarter, as many investors are expecting, would see inflation clearly missing that mark. “I don’t think it’s unrealistic to suppose that growth rates come back, but that doesn’t mean that as far as most people and most companies are concerned, the recession will feel as if it’s over,” Mr King added.

In its quarterly Inflation Report, the Bank indicated that although it may have now reached an end with its £175bn Quantitative Easing (QE) programme, it remains more concerned about the risk of deflation than inflation in the coming years. A protracted recession would only further entrench the lack of supply in the market, the skill shortages already experienced by the construction industry and raise the possibility of further rises in house prices – all factors leading to the original credit “crisis”. Corrective action, has now become an imperative.