House prices look set to end the year higher than they started, but will still face significant challenges during 2010, says the Royal Institute of Chartered Surveyors (RICS).

Following a considerable shift in sentiment in the housing market over the past few months (which has seen prices starting to pick-up in some areas), RICS no longer expects house prices to fall by 10 per cent in 2009, as predicted at the start of the year. Instead, it now looks likely that the average house price in the final months of 2009 will be up on the same period of 2008.

However, this does not indicate a quick return to the boom years, as activity remains very weak by historical standards. Mortgage approvals have gradually improved recently in line with the increase in new buyer enquiries which suggests that demand is strong enough to push approvals up to around 55,000 per month, where they could stay through to the end of the year. This would still leave transaction levels well below the long-run average as a significant increase in approvals is still being hampered, at least in part, by the limited availability of mortgage finance.

A return to a more orderly market is still some way off. The RICS Housing market survey shows that the new instructions balance has been in negative territory for 26 consecutive months, and this lack of supply has been giving some support to house prices in recent months. In addition, while buyer demand has improved, further increases in mortgage rates, rising unemployment or prolonged weakness in the economy could all challenge the emerging recovery in the market.

Brigid O’Leary of RICS adds: ‘There has been a clear change in the housing market over the past few months and, as a result, it is unlikely that we will now see the kind of house price falls widely predicted at the start of the year.

‘However, the outlook for 2010 is fairly uncertain and there is a real risk that prices may slip back again. Affordability is still stretched and mortgage finance, while improving, is fairly hard to come by. The positive news we have seen has been a recovery from record lows and there are still many uncertainties in the economy. In particular, we are concerned about the mortgage finance environment and the impact of further increases in unemployment on house prices.’

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