Australia's capital cities may see prices surge between 5-9 per cent, according to a new report by property analysts SQM Research.

It said interest rate cuts, the "aggressive government stimulus" and the winding back of responsible lending laws will be the main factors driving these price rises.

These predictions coincide with the latest figures from the Bureau of Statistics (ABS), which suggest demand for property has reached fever pitch.

The data showed the value of new home loans climbed to a record high of $22.7 billion in October.

It was slightly higher (+0.7 per cent) than the previous month, but a huge jump (+23.3 per cent) compared to the same period last year.

Capital cities to surge

Perth is expected to be the star performer, with gains of 8-12 per cent on the back of a recovering commodities market, and mining project investment.

Sydney is tipped to be experience the second-largest price gains, driven by proposed changes to NSW's stamp duty and land tax laws.

At the other end of the spectrum, SQM said Melbourne would be the weakest market due to its extended "second wave" lockdowns, number of business failures and a weaker job market, compared to other capitals.

"The ongoing international border closures combined now with evidence of current interstate migration outflows will also put Melbourne at a disadvantage," SQM wrote in its Housing Boom and Bust report.

Record high prices in smaller capital cities

Earlier this week, another property research firm, CoreLogic, said the median property price in Australia had lifted 0.8 per cent to $565,474 in November.

It also noted there was a major difference among the capitals. Prices in Brisbane ($515,267), Adelaide ($459,896), Hobart ($505,683) and Canberra ($672,866) jumped to record highs in November, despite the pandemic.

The firm also said Sydney and Melbourne's average prices have fallen back to where they were in early 2017 (at $860,967 and $672,172, respectively).

Remarkably, Canberra's median ($672,866) had climbed higher than Melbourne's for the first time.

On the flip side, Perth and Darwin housing values had been plunging for years, before they started to recover recently.

CoreLogic said median prices in the WA and NT capitals were back to where they were around 2006 / 2007 (at $463,846 and $406,857, respectively).

Boosting property at any cost

However, SQM's "base case" assumes the nation may be plagued by a third wave of coronavirus infections, more lockdowns, and a "progressive roll out" of a COVID vaccine.

It also assumes the Reserve Bank and Federal Government would be forced to ramp up its stimulus programs.

In particular, SQM is expecting the RBA to keep interest rates near zero and pump even more cash into the economy, while the Government will be forced to extend the JobKeeper wage subsidies by an extra six months, to September 2021.

Even in its most pessimistic scenario, SQM predicts capital city prices will either remain flat, or rise 4 per cent at most.

The different assumptions in that scenario are that the Government phases out JobKeeper in March (as planned), unemployment benefits fall back to pre-COVID rates, and the RBA doesn't inject more cash into the system.

SQM's managing director Louis Christopher said he had "misgivings" about the long-term consequences of these stimulus measures.

"If housing is regarded as an asset class that is not allowed to fall, Australia could have some rather serious social issues surrounding home ownership rates over the long term.

"Many in the community are starting to think they cannot ever lose on housing. That the Government will always be there to step into the housing market, if need be. And that is a scary idea."

First home buyers driven by 'FOMO'

Earlier this week, Reserve Bank governor Philip Lowe told a parliamentary committee: "It's actually a good time, if you're a first home buyer, to buy the property you've wanted".

But first home buyers may already be one step ahead of him, according to the ABS lending figures.

In October, the number of first home owners (on occupier-occupier loans) increased by 13,481.

Although it was much higher the month before (+3.4 per cent), the ABS noted this was an enormous jump (+30 per cent) compared to "any pre-COVID month since 2009".

The ABS pointed out 11 years ago, "the first home owner grant was temporarily tripled as part of the Commonwealth Government's economic stimulus package in response to the global financial crisis."

"FOMO [fear of missing out] must be creeping back into the psyche of first home buyers as they follow the bullish commentary on house prices through to 2022," said Canstar finance analyst Steve Mickenbecker. 

"Investment lending continues to lag, only 2.8 per cent up from last year."

"Investors will be looking for lower vacancy rates before they are likely to jump, and that could be quite some time off with the recovery of migration, overseas student stays and international tourism looking beyond 2021."

Too much borrowing?

In late September, the Morrison Government announced plans to water down responsible lending laws to mitigate the effects of the COVID-19 recession.

At the time, Treasurer Josh Frydenberg said the changes would significantly cut red tape, and would ensure there would be "no unnecessary barriers" to households and small businesses wanting to borrow money.

On Thursday, the latest GDP figures showed Australia's economy had recovered sharply, and was no longer in a technical recession.

"The primary reason for scrapping responsible lending laws was to free up the flow of credit," RateCity's research director Sally Tindall said.

"Looking at today's [lending] figures it's hard to see where the problem is.

"House prices are on the rise, housing finance just hit a record high and first home buyers are finally making their mark.

"We don't need to throw out the current legislation, and risk people getting into debts they can't afford to repay."

Story By | David Chau