This is not a novel about the First World War but it is a novel about what the war did and did not do to Britain.

As the recent events to mark the centenary of the start of the fighting have highlighted, the Great War arguably helped to bring about, or at least accelerate, some social change, most famously votes for women, but what is less discussed is how much stayed the same after the war: poverty, prejudice. None of that died in the trenches.

The specific prejudice Waters tackles in The Paying Guests is homophobia (although it would not of course have been called that in the 1920s, when the book is set).

The novel's central character, a young middle-class woman called Frances Barber, is gay but is not able to live openly as such. At times she seems content with that; other times, she rages against the fact that, despite all the hate of the war, her kind of love is still not possible, or at least only possible in hiding. "What's the good of having gone through the war," she says, "if two people who love each other the way we do can't be together?"

In the early section of the novel, Frances deals with this sexual frustration partly through denial and some furious physical housework which allows Waters to do what she does best: write about atmosphere. In this case, it is the atmosphere of middle-class life in the 1920s, and Waters summons it up in the same crisp, colourful way she did with Victorian London in her historical tour de force Fingersmith and with the 1940s in her ghost story The Little Stranger. There is also plenty of Waters's love for domestic, sometimes dark detail: a mouse caught in a trap; round flesh crimsoning in the heat of a bath; the small tendrils of fabric caught in a head wound.

Her grasp and development of character also remain strong. Frances is in her very early twenties, although because the book is set nearly 100 years ago she is not like a modern woman of that age would be. Rather, she is like a teenager - sometimes immature, gauche and cautious, sometimes rash, brave and hopeful - and as such, is instantly recognisable. There is not a moment where she feels unreal or contrived.

Her love for her tenant Lillian also feels real, which will not be surprising to fans of an author who has demonstrated repeatedly her great skill at writing love stories. In The Paying Guests, she explores again what an emerging relationship feels like and how someone else can make you feel more like yourself. She also writes compellingly about what she calls the little alembic shifts that can make you see people and places differently. "The park had a charm today," says Frances at one point, "that she couldn't recall it ever having before."

Where The Paying Guests is much less successful is in the plotting and the pace of Frances's transformation. Waters is writing about the deepening of friendship, the emergence of desire and the drawing in of love, but it all takes far too long to happen, partly because we are way ahead of Frances and can see what will happen to her.

The plot suffers the same problem. It is not just that there is a lack of incident (several of Waters's other books lack incident); it is that the plot that does exist is too signposted and unsurprising. At one point, relatively early in the novel, Lillian expresses her desire that her husband will die and therefore solve her problems, and we can see, illuminated by runway lights, where the plot is going to land.

Successful as the other elements of the novel are - atmosphere, character, and its themes of love and deception - they cannot compensate for the failure of the book to tighten its grip on the reader. Where it does succeed, because it is Waters's great skill, repeated time and again, is in dealing with gay love and emotions and in this case exploring the frustration of living as a gay woman in the 1920s. "We become narrow and mean when we live falsely," says Frances. "I'm sick to death of living falsely." It is a sentiment that vibrates through a novel that may lack pace but never lacks great perspicacity about the gay experience of 100 years ago and, to a great extent, the gay experience of right now.