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The Rental Riddle

House prices are likely to finish the year up by about 7%, despite dire predictions of falls of up to 20% at the start of 2009.

The value of the average property fell by 19% from a peak of £186,044 in October 2007, to a trough of £147,746 in February this year, according to the Nationwide house price index.

Confidence returned, however, with the market bouncing back 8% to £162,764 in November as the expected flood of repossessions failed to materialise and buyer demand outstripped the supply of property coming on to the market.

Growth next year is forecast to be modest. The Royal Institution of Chartered Surveyors (Rics) predicted last week that house prices would rise 2% at best with early gains wiped out later in the year by sluggish economic growth and limited finance for first-time buyers.

Assetz, the property group, is the most bullish of our forecasters, predicting that average prices will rise up to 5% because housebuilders will struggle to build more property and interest-rate rises are more likely to be modest than severe.

Capital Economics, the research consultancy, believes prices could dip 10% as unemployment and interest rates rise, although it could be “several more months” before we get the double dip in prices.

Seema Shah at Capital Economics said: “The shortage of property for sale has been the main driver of recent house price rises. Once that shortage eases, the still weak economy, rising unemployment and tight mortgage lending criteria will result in renewed price falls next year.”

Capital Economics was the most bearish of our forecasters in 2009, predicting falls of 20%.

Investors hoping for less pedestrian returns from property in 2010 should look to prime London homes and specialist sectors such as student accommodation, experts said. Some student property funds have returned as much as 26% this year.

We look at the better performers of the year and how to beat a modest market in 2010.