May 8 (Bloomberg) -- Nyasha Kuwana won’t be taken in by signs of recovery in Britain’s battered housing market.

“I think the market may get worse,” said Kuwana, a 29- year-old insurer who put off her search for a one-bedroom flat in West London earlier this year. “I will be no worse off buying in six months.”

A 17 percent slump in prices since their peak last year and the lowest interest rates in the Bank of England’s history have stoked optimism among banks such as UBS AG and real-estate agents that buyers will soon return. Mortgage approvals rose to a 10-month high in March.

As Britain struggles to escape the worst recession since Margaret Thatcher came to power in 1979, Kuwana and a generation of first-time buyers may nevertheless need more persuasion before committing their savings.

Earnings will be crimped by rising unemployment, which the Confederation of British Industry says may climb more than 50 percent to 3.3 million next year. The International Monetary Fund forecasts that the economy will contract 4.1 percent this year and 0.4 percent next.

“House prices are still set for another year of declines,” said Willem Buiter, a former Bank of England policy maker. Capital Economics Ltd. says that home values have another 20 percent to drop.

Belsize Park

“Frankly, I think we’re better off renting,” said Lucian Grant, a 30-year-old trainee architect, who has looked at properties with his fiancee worth as much as 700,000 pounds ($1.1 million) in London’s Belsize Park, home to movie stars such as Gwyneth Paltrow and Helena Bonham-Carter. “I would rather wait and get more for my money.”

Signs are emerging that the worst housing slump since the 1990s may be easing. The Royal Institution of Chartered Surveyors says enquiries by potential buyers rose in March by the most in more than five years. House prices climbed that month for the first time since October 2007, said Nationwide Building Society.

London estate agent Kinleigh Folkard & Hayward said today that home sales in April rose 30 percent from a year earlier.

The Bank of England has cut its benchmark rate to 0.5 percent, the lowest since it was founded in 1694, and mortgage approvals rose to 39,000 in March, up from a record low of 27,000 in November.

Low Levels

“We are still at low levels but demand in the mortgage market is picking up, and transaction levels are increasing,” said Amit Kara, an economist at UBS and a former central bank official. He expects prices to fall 15 percent before stabilizing at the end of this year. Goldman Sachs Group Inc. said in March that a housing market recovery was “in sight.”

Simon Rubinsohn, chief economist at RICS, says “prices can begin to stabilize” at the end of the year.

That’s stoking interest among more affluent buyers, says Robert Green, an associate director at estate agent John D. Wood in London’s exclusive Chelsea district. He recently sold a house there for about 10 million pounds.

“We agreed more deals in March than we have at any time since October 2007,” said Green. “As far as price drops go, I think we’ve reached the bottom.”

More experienced market players are also benefiting. James Evans, a 33-year film researcher, sold his apartment in Kilburn at the peak of the boom 18 months ago and then sat out the downturn in rented accommodation. This week, he moved into a three-bedroom house in Chalk Farm that he bought for 750,000 pounds, 20 percent less than its original asking price.

Getting Lucky

“A few months ago, we didn’t even think it was worth looking at as it was too expensive,” said Evans. “But then it came up again and it had come down a lot. We got lucky.”

First-time buyers, accounting for around two fifths of approved mortgages, may find it harder as banks brought close to collapse by the financial crisis restrict access to credit and require larger down payments.

“Getting a mortgage is tough these days, and a 25 percent deposit is nigh impossible,” said London-based Oliver Spero, a 27-year-old surveyor. “The only people benefiting at the moment are those with enormous amounts of money.”

The median down payment in February was 25 percent of the property’s total value, up from 11 percent a year earlier, a CML report showed. An average home, based on Nationwide data, now requires a deposit of about 38,000 pounds. In London, where the average price is 242,678 pounds, that rises to 61,000 pounds.

Mortgage Debt

Signs of recovery may also prove transient. While Nationwide’s index of house prices jumped 0.9 percent in March, it declined 0.4 percent the following month. Sanford C. Bernstein & Co. estimates that 1.8 million Britons will be saddled with mortgages greater than the value of their homes by 2010.

That all means the green shoots of recovery aren’t strong enough for Kuwana to jump into the market.

“I don’t consider my first property an investment,” said Kuwana, who has been saving up for a deposit since leaving university and plans to spend as much as 300,000 pounds. “So I have to make the right move at the right time.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

Last Updated: May 8, 2009 07:31 EDT