"At £162,103, the average price of a typical UK property has ended the year 5.9% higher than at the end of 2008. Few could have foreseen this development at the start of the year, when the near term price trend was still pointing to a repeat of the double digit annual decline experienced in 2008. Although house prices are still 12.2% lower than their October 2007 cyclical peak, they have now rebounded by an impressive 8.9% since their February 2009 trough.

A look back at 2009

"The increase in house prices over the last year has surprised most commentators. However, with the benefit of hindsight, there are good reasons why prices have been able to stage a rebound even as the UK has endured the worst recession since WWII. With house purchase transactions having fallen by 65% between their January 2007 peak and their November 2008 low, a significant amount of pent-up demand had begun to build up in the housing market at the start of 2009. As interest rates hit record lows, those potential buyers with enough cash to circumvent tight credit conditions re-entered the market, leading to a steady pick-up in housing transactions throughout the year.

"The re-entry of cash rich buyers into the market coincided with an extremely low supply of property available for sale, as low interest rates limited the number of distressed sales and a significant number of home movers decided to offer their properties for rent rather than sale. This restriction in supply meant that even a relatively modest pick-up in demand was able to put upward pressure on house prices.

"There are of course other factors that have been important in driving the recovery of house prices. Most notably, unemployment has not risen by as much as would normally be the case in such a deep recession, as many employers have kept workers on using reduced hours and lower pay. In addition, the stabilisation of the banking system and emerging signs of economic recovery have helped to boost consumer confidence and tempt previously hesitant buyers back into the market.

Key factors to watch for in 2010

"Looking ahead into next year, a number of factors appear key to the outlook for house prices. As ever, the prospects for interest rates will be an important driver. Although house prices remain quite high relative to earnings, the low level of interest rates has led to a significant improvement in mortgage affordability that has supported prices. At this stage, it looks like the Bank of England base rate will not increase until at least the second half of 2010, as the Monetary Policy Committee (MPC) will need to see firmer evidence of economic recovery before it considers increasing the cost of borrowing. However, inflation has been surprisingly resilient in 2009, due in part to the weakness of the exchange rate. If the pound slips further and inflation continues to surprise to the upside, interest rates may increase earlier than widely assumed. In addition, government bond yields may increase as the Bank of England’s quantitative easing programme comes to a halt and concerns over the fiscal deficit prompt investors to demand a higher return on government debt. All else equal, higher government borrowing costs would also increase the cost of fixed rate mortgages from today’s low levels. On balance, however, it still looks like interest rates will remain generally supportive for the housing market and mortgage borrowers during most of 2010.

"A further uncertainty is whether cash rich buyers can continue to support housing demand. Although there are tentative signs that mortgage credit conditions are beginning to loosen slightly, they remain significantly tighter than before the downturn due to the after effects of the financial crisis. As a result, the housing market continues to depend on those with relatively large amounts of cash or housing equity to support demand. It is not clear, however, how large the pool of cash rich buyers is and how long it will continue to support transactions. If the steady trickle of cash rich buyers into the housing market loses momentum, the supply-demand balance could once again shift in favour of buyers and cause the upward trend in house prices to stall.

"Another major factor of uncertainty remains the outlook for the labour market. Recent news from the job market has certainly been encouraging, with the latest figures on claims of jobseekers allowance even showing a decline for November. In the near term, the recent trend of stabilising employment conditions may continue. However, it appears likely that the public sector will eventually see significant job losses as fiscal policy is tightened. If the economy does not recover quickly enough, the private sector may not be in a position to create enough jobs to offset these losses.

"Taking everything together, there is still a significant amount of fog clouding the outlook for house prices. This year’s recovery has to some extent been driven by transitory factors and there are reasons to believe that it will lose momentum over the coming year. At the same time, there is no obvious catalyst on the near-term horizon that would trigger significant renewed falls in prices, such as a sharp spike in interest rates or a further pronounced tightening of credit conditions from present levels. At this stage, therefore, it seems likely that 2010 will see no significant house price movements in either direction. However, the experience of 2009 demonstrates how unpredictable the market is at the current juncture and that one should always be prepared for the UK housing market to surprise".

"The prime London market has been the strongest property sector in the UK this year, benefitting from substantial inward investment from overseas buyers looking to take advantage of the weak pound and lower overall prices. The number of buyers increased by 25% in the whole of 2009 compared to 2008. Led by interest from Russia, Europe (especially Italy) and the Middle East.

"In summary the year is ending on a high note. With demand from new buyers almost 25% higher than a year ago, and supply around 18% lower over the same period - investors and occupiers are competing hard to uncover the best properties, and limited supply is leading to competitive bidding. The short term outlook looks positive, longer term market performance rather depends on the outcome of the election and next year’s emergency budget".

This is in stark contrast to levels seen late last year when the housing market was still suffering from falling prices and many would-be sellers were turning to the lettings market when their houses failed to sell.

Currently the reading for past rents, although still negative, is the least so since July 2008, with only four percent of Chartered Surveyors still reporting falling rather than rising rents, indicating that the downward pressure on rents is already starting to ease. Significantly London and the north are already seeing the majority of surveyors reporting price rises over the past three months.

"The 3 month on 3 month rate of change – generally a smoother indicator of the near term trend – dropped to 2.8% from 3.5% in October and 3.8% in September. This suggests that house prices are now rising at a more moderate pace than in the spring and summer months, when they experienced a very strong bounce from the early 2009 lows.

"The outlook for the housing market remains crucially dependent on labour market conditions, and here recent developments have been somewhat more encouraging than might have been expected.

"With the UK experiencing its longest and deepest recession since WWII, most economists expected unemployment to increase very sharply in 2009, perhaps breaching the psychologically important three million mark by the end of the year. While unemployment has indeed increased noticeably, the rise has not been as rapid and pronounced as previously feared. Based on the latest labour market figures from September, it now looks unlikely that the jobless total will reach three million before the year is up".