Two years ago, it all seemed so straightforward. The Bank of England had raised interest rates five times and the housing market was feeling the pinch. House-price inflation slowed sharply, skirting close to zero on an annual basis, as buyers were deterred by the rising cost of borrowing and warnings of a price crash. Mortgage applications fell sharply, and to some it seemed only a matter of time before prices would follow.

Then something interesting happened. The bank stopped raising interest rates, removing fears that the cost of borrowing would carry on climbing. In August 2005, it cut rates by a quarter of a point, a move that famously triggered the biggest rise in house prices during the past couple of years.

Whether it did so or not is a matter of debate, as the mortgage-approval figures suggest the market was already picking up. One thing, however, is clear: an apparent housing-market dive turned into a soft landing, then a strong recovery.

Scroll forward to 2007, and the bank has delivered its equivalent of that August 2005 cut, reducing its rate from 5.75% to 5.5% on December 6. It has done so, it should be said, much earlier in the cycle. Annual house-price inflation is still strong, though it is falling sharply on some measures: the latest official reading from the Department for Communities and Local Government put it at 11.3% in October, compared with 10.8% in September. And mortgage approvals have not yet fallen to the low monthly levels they hit in 2005.

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Housing costs taking their toll

The question that always accompanies fresh data showing a fast-growing housing market is: are we headed for a crash?

So, will the Bank of England pull off the same trick again? The comparison with two years ago falls down because of the impact of the credit crisis. Unusually, because of conditions in financial markets, the cut in its rate has not been matched by falling money-market rates.

For banks and building societies, this means that the cost of funding their lending in the wholesale money markets has stayed high. It may fall, particularly as we get beyond the end of the year, but with uncertainty still stalking the markets, that is by no means guaranteed.

There is another factor at work. Partly to cover themselves against losses on their financial-market investments, some related to the US sub-prime market, lenders are keen to increase their margins - in other words, to widen the gap between the cost of their funding and the rates at which they will lend. Rachel Lomax, a deputy governor at the Bank of England, suggested that the margin between its rate and typical rates for borrowers will remain significantly bigger than in recent years.

So, we have a situation where the Bank of England’s actions are likely to have less impact than they did two years ago. Even the prospect of more rate cuts, which the markets expect, will be less of an elixir for the housing market than it would be in normal circumstances.

How will all this pan out? My view - shared by several forecasters - is that the positive effect of rate cuts will balance the negative impact of the credit crisis, giving us flat house prices for 2008 as a whole. Others, it is only fair to say, are gloomier.

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