June 2 (Bloomberg) -- There are signs that the British housing market may be touching bottom, with prices and mortgage approvals rising in the last month.

Both suggest that the worst of the slump is over.

But it would be a big mistake to read too much into those figures -- and it certainly isn’t a signal that the U.K. economy is pulling out of the steepest recession in the last 20 years.

While house prices may steady, they still have further to fall. Though property inflation may have led the last boom, it won’t lead the next one. The U.K. economy still has plenty of pain ahead.

The very worst of the declines in house prices probably are in the past. Last week, the Nationwide Building Society reported that the average cost of a home jumped 1.2 percent in May, compared with a drop of 0.3 percent in April. The annualized fall in prices is now running at 11 percent versus 15 percent a month earlier.

A survey of real estate agents by Hometrack Ltd. released yesterday showed that prices stopped falling in May, the first time they didn’t decline in 20 months. That still isn’t great, but it is an improvement.

Meanwhile, the British Bankers Association reported last week that the number of mortgages approved rose in April. Banks issued 27,685 loans, compared with 26,671 in March. That’s another sign the market is moving again.

Reading the Signs

It won’t be hard for people to start reading signs of a recovery in that data. The U.K. has taken a terrible beating in the global recession. Gross domestic product dropped 1.9 percent in the latest quarter, the most since 1979, according to the Office for National Statistics. The International Monetary Fund now expects the British economy to shrink by 4.1 percent in 2009.

Much of the U.K.’s prosperity in the past decade was based on the boom in house prices. As the value of their homes soared, people felt wealthier, they took out bigger mortgages, and they spent more. The banking industry expanded to supply loans.

If that’s what fueled the boom last time around, there’s an argument for saying that as soon as the property market starts climbing again, the rest of the economy can start to revive as well.

The property market, though, isn’t going to strengthen any time soon. And even if it does, it won’t make much difference to the rest of the economy.

In a market that is falling, there will always be one or two months when prices edge up. It’s called a blip.

Deep Freeze

Eighteen months ago, the U.K. property market froze. The offices of real estate agents were empty. Over time, any market will start to thaw. People have to move. They change jobs, have more children or get divorced. Any of those steps involve getting a new house or selling an old one. People can’t put their lives on hold indefinitely. At some point a more normal market will emerge.

But it is a big step to say the market will return to its pre-bust glory. The Financial Services Authority, which regulates the U.K.’s banking industry, is currently stress testing the British banks, along similar lines to the U.S. stress tests. Its scenarios include “the impact of a 50 percent peak-to-trough fall in house prices.” That might turn out to be too pessimistic, although it would be good to know the banks could survive even that.

Still, it indicates how far some people think prices might fall.

Average Prices

The average house price was 180,314 pounds ($295,859) in April 2007, based on the Nationwide index. It now is 154,016 pounds, about 15 percent lower. There is a long way to go before the market gets anywhere close to that 50 percent fall that has the FSA so worried.

“During the downturn of the early 1990s, there were many months during which prices rose, only to fall back down again in subsequent periods,” said Nationwide’s chief economist, Martin Gahbauer, in a statement.

More importantly, although the last boom in the British economy was driven by house prices, the next one won’t be.

The U.K. still needs to go through a painful period of adjustment, during which it creates new global industries. An economy built on ever-increasing debt, rising house prices, huge trade deficits and rising government spending isn’t going to be much of a recipe for surviving the post credit-crunch world. The U.K. has hardly even begun the process of re-constructing its economy.

In truth, house prices probably are bouncing along the bottom rather than recovering.

A stabilization of the housing market does matter, at some level, because it may help steady the banking system. It also matters to people trying to move or sell a house. No one should imagine, though, that it is a signal that the U.K. economy is turning the corner.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

Last Updated: June 1, 2009 19:01 EDT