London Briefing: The British housing market continues to send conflicting signals.

Anecdotal evidence of a fairly sizeable slowdown have, to an extent, been contradicted by recent data from one or two prominent mortgage banks suggesting that prices are not falling by as much as is feared.

Plenty of forecasters believe that house prices are likely to fall by as much as 20 per cent this year.

Weakness in housing, alongside reports of a weak Christmas for retailers, have led many analysts to suggest that the next move in base rates will be down.

Indeed, expectations of lower rates may have stimulated the property market through the turn of the year, explaining the relatively buoyant data for December from HBOS bank. Their data suggest that property prices rose by a surprising 1.1 per cent in the month.

That meant that house prices rose by 15.1 per cent in 2004.

Most of the rise in prices came in the first half of the year: prices rose by only 2.8 per cent during the last six months.

London and the south-east had the weakest markets in 2004, rising by only 4 per cent and 7 per cent respectively.

The biggest gains of the year were in the supposedly depressed north and north-west: each recorded around 27 per cent price hikes.

As a matter of fact, the regional dispersion of price movements probably explains the conflict between data and impressions.

Widespread reports of the demise of the property market are usually written by analysts and commentators living in London, hence the doom and gloom.

Anyone living north of Watford probably feels that while things have cooled, market conditions are not that bad.

That said, there are one or two straws in the wind that suggests the London market is showing signs of life.

The massive regional variations in the housing market hugely complicate the task of the Bank of England.

Futures markets are pointing to unchanged interest rates for at least the next three years.

Base rates have been at 4.75 per cent since the summer of last year; inflation has remained below its 2 per cent target since then. Indeed, inflation was last above the (new) target back in 1998.

Some people have speculated that price rises might actually fall to a point that embarrasses the British central bank. These concerns will have been eased a touch with a rise in inflation, in December, to 1.6 per cent, somewhat ahead of forecasts.

Given the rise in oil and other input costs in 2004 it is surprising, perhaps, that inflation has not moved even higher. It could well be that there is further inflation in the pipeline - there are signs, not just in Britain, that this could indeed be the case.

The US central bank, the Federal Reserve, has been signalling a heightened fear about inflation, suggesting that it might be prepared to accelerate its "measured" pace of tightening.

It is no coincidence that both the British and US economies are pondering the future of interest rates. Both countries have overheated property markets and large external deficits. Both central banks have been concerned to normalise interest rates from prior "crisis" levels.

What is becoming increasingly clear is that economies like the US and particularly Britain are more sensitive than ever to interest rate changes in any direction. If mere talk about the prospect of lower rates can stimulate the property market, imagine what an actual cut would do.

Borrowing to facilitate property purchases is just one example of the wider phenomenon of increased leverage: there is an awful lot of borrowing out there, much of it consumer-related.

Market commentators continually fret about the possibility of a financial accident, should one or more highly-geared institution get into difficulties if rates have to rise faster than expected. Memories of the consequences of the failure of Long Term Capital Management are still fresh.

The glory days of the British property market are now behind us. A small fall in house prices this year would suit the Bank of England; a crash would not. Hence, it is probably right to expect interest rates to remain on hold for the foreseeable future.

But it would also be right to expect the bank to be extremely reactive, in an obvious way, to any surprises emerging from real estate.

At the very least, the bank is determined to avoid the price bubble inflating any further - and it has all of the necessary tools at its disposal to achieve this goal.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.