THE British government's pre-election strategy of reviving the "feel good" factor by throwing cheap money at the housing market looks to be paying off at last.

With house inflation now growing at an annualised 5 per cent and tipped to increase in coming months, recovery in demand for home loans has now reached levels not seen since the middle of 1992.

Gross advances by building societies of £3.68 billion sterling in June increased by £130 million compared with the same month last year. More significantly, net new lending rose 12 per cent to £1.43 billion due to increased demand from first time buyers and reduced remortgaging activity.

The improvement is set to continue. Outstanding approvals at the end of June reached £8.2 billion, over £2 billion higher than at the beginning of the year and the highest level since 1990,

Mr Adrian Coles, director general of the Building Societies Association, said the figures illustrated "the continuing recovery in the market".

"Strength in the consumer side of the general economy, coupled with stronger house prices, reported sharp falls in negative equity and lower mortgage rates after the reduction in base rates in June, are all likely to help to increase confidence," he said.

"These factors, along with the continuing strength of approvals, mean that higher levels of activity are likely to be sustained in the coming months."

The positive figures now coming from the housing market are likely to stiffen the Bank of England's opposition to any further reductions in interest rates, despite widespread evidence of subdued inflationary pressures elsewhere in the economy. But the political need for further interest rate cuts will be lessened if reviving house price inflation leads to improvement in the government's popularity ratings.