House prices were meant to collapse in 2009. By April, prices were down by almost 20% year-on-year and the public and markets were bracing themselves for a massive wave of repossessions and even greater falls.
It didn't happen. UK house prices bounced sharply over the next eight months or so and are now about the same as they were a year ago, depending on which index you use. Now I'm happy to admit to being a property pessimist and this year's market strength came as a surprise to me, at least at first.
But there are good reasons why house prices didn't collapse this year. The bad news for property optimists is that these won't be sustained through 2010. I suspect that next year will be, at best, a mediocre one for property and, at worst, downright grim.
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How house prices defied gravityRising unemployment, check. Prices still ridiculously high, check. Harder to borrow money, check. Everything pointed to the collapse in house prices continuing this year. So what changed?
There's one pretty straightforward answer: the Bank of England. Interest rates were slashed to near-enough zero and the Bank started printing money via quantitative easing.
This didn't help much with mortgage availability - new borrowers needed (and still need) huge deposits compared with the easy credit years leading up to 2007.
But what it did achieve was to keep people in their homes. With interest rates falling, anyone who came off a fixed-rate mortgage onto their lender's standard variable rate saw their payments decline, rather than rise. A few lucky people on hyper-low trackers even saw their interest payments drop to zero.
This was a key difference between now and the 1990s house price crash. Low rates have given even overstretched people a bit of breathing space to sort out their finances.
Banks have also been reluctant to recognise losses on property (which would make their profit figures look even worse), so arguably they worked harder to be lenient on people.
That's kept down repossessions. Although they are likely to be up on last year (around 48,000 compared to 40,000-odd in 2008), they haven't leaped to the 75,000 level expected at the start of the year.
That's genuinely good news for people who haven't lost their homes. But there are two problems: the reprieve may be temporary and activity in the housing market has pretty much dried up.
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Supply has dropped off faster than demandOn the one hand, lots of people can't afford to move. They can afford to stay where they are, but they can't raise the extra money needed to move up the ladder or, in some cases, pay off the negative equity on homes still valued at less than what they bought them for.
With mortgage availability still tight, but prices for desirable homes pretty stable, it's harder than ever to trade up.
There's also been something of a stand-off between sellers and buyers. Homeowners are still largely thinking that they should be able to sell their home for 10% more than they bought it. So they have no intention of putting their house on the market until prices have very obviously picked up again.
So, basically, there's very little supply on the market compared to usual. As Henry Pryor of Housingexpert.com points out, 99,000 properties came onto the market in October. That compares to a long-term average of around 169,000.
When supply falls, as long as demand doesn't fall as rapidly, prices are likely to rise. This hasn't really been the case across the country, but has mainly been true in the south-east and London.
However, that's been enough to bump up the various price indices. So even though mortgage approvals are at historically low levels, demand from cash buyers seeking a home for their money (with cash interest rates so low) and demand from overseas buyers taking advantage of the weak pound has helped.
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Why all this could change in 2010There are a number of reasons why this could all change in 2010. If prices keep recovering this, in itself, will sow the seeds of another fall.
As prices rise more people will be tempted to sell their homes. More houses for sale, coupled with the same strict mortgage rules stopping people from buying, will tilt the scales away from the sellers and prices will naturally fall.
Also, interest rates can't go any lower. British banks aren't out of the woods yet by any manner of means. We could easily have another shock next year (lots of countries for example, including our own, are on the watch-list for going bust) which drives borrowing rates up across the spectrum. That would also drive repossessions higher.
Other problems still with usUnemployment is also still rising, which is likely to continue through 2010, and that's never good news for house prices.
Fewer wage earners means fewer mortgage bills being paid. On top of that, Alistair Darling has already warned that even public sector wages are set to feel the squeeze.
And that's on top of the hefty hike in income tax (politicians call it national insurance, but it's the same thing, and I can't be bothered going along with the lie anymore) he's planning to impose, assuming Labour gets back into power next year.
There's also the bank bonus tax. If bonuses are deferred, then we might see activity in the top end of the market drop off early in the year. But I think a bigger issue is the wider sense of confidence.
I don't believe the wealthy are quite as mobile as they'd like everyone to believe, but I can certainly see why people with money would by now be making enquiries about upping sticks, just in case more "soak the rich" policies are introduced.
That might put them off making any permanent decisions, such as buying expensive homes, until they feel more secure with the political climate.
So we'll all have less money in the future, borrowing costs can only go one way and supply can also only rise.
We might be in a temporary "sweet spot" for house prices now, but I can't see how it will last.
House prices are still too highThere's a more fundamental problem. House prices are quite simply still overvalued.
According to a report this month from Shore Capital for example, the ratio of UK house prices to earnings suggests that house prices need to fall by 27% to "restore the long-term trend rate".
If you ignore the period between 2001 and 2007, which consisted of particularly slack lending, then the average selling price would need to fall by as much as 38%.
Shore also points out that mortgage approvals would need to rise to more than 100,000 a month to sustain ongoing property price rises in a normal market. They're currently climbing, but still sitting well below 60,000 a month.
Looking aheadOnce you take that all into account it means that by this time next year house prices will be falling again. What does this mean for you? Well, I wouldn't invest in property.
Unless you're an experienced landlord and you know how to spot and pick up a bargain at auction without getting ripped off (and I doubt there are many of those people around) then now is not the time to be putting more cash into property. The potential returns simply aren't great enough compared to the risks.
As for buying a home - well, that's the same as always. It depends on your circumstances.
The difference between buying now when prices are clearly high and buying when prices are obviously low is in the margin of error you need to consider.
When prices are high, you want to have a bigger deposit to cushion you against potential falls. You want to make sure that you could survive interest rates jumping by several percentage points in a short space of time. You want to feel secure in your job and comfortable with the idea that you won't have to move at short notice.
And you have to accept that maybe when you come to sell, your home will be worth less than you bought it for. This is no disaster if you're moving house as the price of the place you're trying to buy will have fallen too. So if you can tick all those boxes, then that's fine.
What you don't want to do is overstretch yourself (even if your bank will let you) and cross your fingers in the hope that prices will keep growing to the sky. That's just gambling and right now I don't think that's a smart gamble to take.
John Stepek is editor of MoneyWeek
