Bottom Line: Building on recovery

HOUSE BUILDERS may be reluctant to uncross their fingers just yet, but the official housing statistics lend weight to anecdotal reports of a recovery in the market.

Although prices remain low and few analysts expect any increases until next year at least, the swingeing write-offs of land - about pounds 1bn over four years - mean land is at last realistically valued. And cutting the cost of gimmicks, not to mention spreading overheads against higher volumes, should do wonders for profits.

The City, which has sent the sector's shares up 30 per cent relative to the market since the beginning of the year, has clearly cottoned on. That has produced some toppy-looking valuations - Tarmac and Wimpey, for example, are on about 22 and 24 times 1994 earnings respectively, premiums of more than 50 per cent.

That is based on analysts' forecasts of a slow recovery. But, having got the depth and speed of the downturn horribly wrong, they could well be caught out by the strength of the upside. An analysis by NatWest Securities shows that a slightly better-than-expected recovery could have a huge impact on forecasts - Wimpey, for example, could earn a third more next year if house prices were to rise by 7.8 per cent rather than 5.6 per cent.

For those willing to bet on a stronger recovery - and the evidence so far this year is with them - there could be something left to go for in the shares of companies like Wimpey, Tay Homes and Westbury.