Is it boom time all over again?

The lessons learned from the boom-and-bust cycle of the late 1980s mean the homeowners will never go through such heartache again - at least, that is how conventional wisdom would have it. But is it true? Has the recovery we are witnessing peaked, and are we now entering a more stable period as higher interest rates take effect, more properties become available and gazumping makes people think twice before buying?

That would be the obvious conclusion to draw from recent findings by the Land Registry, which announced that the average London house cost 13 per cent more in the period between April and June of this year, compared with the same period last year. This is only slightly higher than the rise at the end of March - 12.2 per cent. Levelling off would seem to be the name of the game.

But there is a counter view. Bullish predictions continue to buzz around in reports like the one published last week by Morgan Grenfell, which predicts increased activity in the market and plenty of room for prices to continue to rise.

James Barty, the author of the report, admits to surprise that the pick- up in the market has been so sharp, with house prices, turnover and new mortgage commitments all reaching levels not seen since the end of the 1980s. Turnover in the second quarter of this year rose 20 per cent on a year earlier, while July saw the highest activity since 1989. Estate agents continue to report strong demand, while site visits and new house reservations are ahead of levels a year ago.

The rise in house prices has been particularly sharp in London and the South-east, with a 17 per cent hike as the average. There is anecdotal evidence of much greater increase in sought-after areas - up to 50 per cent year-on-year in some cases. But does this mean that the market has reached a new equilibrium quickly or are we on the verge of another boom in the capital?

"It seems likely that prices will continue to rise at a fairly rapid pace in London and the South-east," is Mr Barty's opinion. "We expect to record double-digit house price inflation through next year." And he expects the ripple effect to make itself felt throughout the rest of the country.

The Morgan Grenfell report argues that three conditions are in place for this upswing to be sustained. The first is affordability. Despite recent rises, prices are still below a "fair" value. That is, the ratio of house prices to average income is still low. This ratio is crucial and, historically, the best indicator of future trends. If we plot house prices over the long term against income (and certain other measures of affordability such as interest rates), the two follow each other closely. At the moment and despite recent growth, prices are still below or just reaching the income line (depending on area) which means there should be room for growth.

Second, because of competition in the mortgage market, the recent rises in interest rates have had little effect on prices. This is because there are so many cheap, fixed-rate mortgages around. People can lock themselves into five-year fixed-rate plans that are set at a lower level than the present mortgage rate. The importance of this is reflected in the proportion of households opting for fixed-rate loans - up from less than 25 per cent last year to 45 per cent in the second quarter of this year and an estimated 60 per cent in this quarter. "If people can lock themselves in, they don't worry about interest rates," says Mr Barty.

There are those who argue that the cushion provided by fixed-rate mortgages will not last for long. There have even been predictions of disaster in the market when, early next year, tens of thousands of borrowers emerge from two-year fixed-rate deals at between 4 per cent and 5 per cent and see their payments double. Some say the market will collapse and we may even see a return to negative equity, but such predictions are brushed off by most commentators as extreme. Mr Barty predicts that rather, as deals start to disappear (which he doesn't expect to happen quickly), the market will gradually stabilise.

The final point in the Morgan Grenfell report is that incomes are proving the driving force in the market. The Chancellor's Miras and stamp duty measures in the Budget will not in any significant way affect incomes and with average earnings likely to outpace underlying inflation over the next 18 months, this will be reflected in the housing market. "My advice is to buy now if people see a house they want," says Mr Barty.

Not everyone is so bullish. Roy Boakes of Abbey National sees most of the growth continuing in London and does not anticipate a universal boom. He detects a long-term trend towards the stabilisation of property and believes there is a political will to see off rapid growth.

Others don't agree, however. "I'm not convinced the boom/bust mentality is over," says David Miles of Imperial College, who has recently completed a report on the market for Merrill Lynch. "It is very difficult to predict house prices in the short term because so much depends on what people think. If enough people think prices are going to rise, they will bid them up. It becomes self-fulfilling."

He is also unconvinced that the Bank of England - which now has control of interest rates - has the same concern over house price inflation as the Government. "The Bank of England is more interested in consumption than house prices per se," he says.

The last word goes to Mr Barty, who thinks there is plenty of room for growth. "In the late Eighties in London, prices were 30 per cent above where they should have been [in terms of affordability]. If they go just 10 or 15 per cent above this time then that means 10 per cent growth for the next two or three years. And in many other areas prices are still undervalued."

Buy now to avoid the rush.