House prices look set to end the year higher than they started, but will still face significant challenges during 2010, according to the latest housing market update from the Royal Institution 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% in 2009, as predicted at the start of the year. Instead, it now looks likely that the average house price in Q4 2009 could be slightly higher than in Q4 2008.

However this does not indicate a quick return to the boom time, as activity remains very weak by historical standards. Mortgage approvals have gradually improved recently in line with the increase in new buyer enquiries, according to RICS, and this relationship 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. RICS believes 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.

Meanwhile the lack of new house-building, which was already a major cause for alarm, has been exacerbated by the recession – housing completions in England could come in at around 75,000 this year. Failing to address this issue will add significantly to affordability pressures in the future.