A report is predicting house price rises of more than 20 per cent over the next three years in some capital cities.

QBE Lenders’ Mortgage Insurance has released its Housing Outlook for 2010 to 2012, which is forecasting price rises of between 12 and 23 per cent in Australia’s capital cities by 2012.

The largest rises are expected in Adelaide and Sydney.

Adelaide is forecast to have a 23 per cent rise in house prices because of its current relative affordability, while a 21 per cent increase is predicted for Sydney based on the city’s housing shortage and price stagnation since 2003.

The report also expects strong price increases in Melbourne (19 per cent) and Darwin (17 per cent), but weaker price growth in Brisbane and Hobart (15 per cent), with the most sluggish growth in Perth and Canberra (12 per cent).

Economic forecaster BIS Shrapnel researched and wrote the report, and its managing director Robert Mellor says concerns that removing the boosted first home owners grant would deflate the market seem unfounded.

“Upgraders are now back in the market, in fact really across all capital cities not just the eastern seaboard, and there’s very clear signs over the last two or three months of the return of investor demand, so I think we can be fairly confident going into 2010 that we’re not going to see a double-dip in the market,” he said.

Mr Mellor says the booming population, and shortage of rental properties, means housing demand from first home buyers will remain strong.

“First home buyers are going to continue to be attracted by low interest rates and the fact that, in terms of the sums, in terms of purchasing verses renting at the moment, we’re probably in the best conditions we’ve been at for purchasing over renting for ten years.”

Forecasts questioned

However, some other property analysts have questioned the forecasts, including Louis Christopher, the managing director of SQM Research.

He doubts the accuracy of some of the data in the BIS Shrapnel report which comes from the Real Estate Institute of Australia, including rental vacancy figures which he says tend to overestimate the housing shortage.

Mr Christopher broadly agrees with BIS Shrapnel’s forecasts for the next year which predict only modest growth of between 1.4 and 6.3 per cent in the different cities in 2010, but he says there are too many variables affecting house prices to predict medium-term movements with much reliability.

“I also question previous reports released by BIS Shrapnel, with their two and three year forecasts, which I’m not so sure have proven to be very accurate,” he told ABC News Online.

Another area of the forecasts that concerns Mr Christopher is the interest rate assumptions used in the report.

BIS Shrapnel is factoring in 1.5 percentage points in official rate increases over the next two years, but only 1.15 percentage points being passed on to home loan rates by the banks.

Louis Christopher says these forecasts are well below current market predictions, and he also questions whether the report adequately takes into account the extra impact rate rises have given Australia’s high personal debt levels.

“Given the level of housing debt we have in this country, and overall private debt to GDP which is at quite a considerable high, it’s actually near a record high at this time, it means that… borrowers are very susceptible to interest rate rises, probably more so than at any time in the last 30 years,” he said.

“This time round with the cycle, it probably won’t take interest rates to get to 9 per cent to stall the market, or to make the market fall, it’ll probably take something less. And that’s one thing I question the BIS numbers on is what happens if we see interest rates at that time [in two or three years] at say 8 per cent or 9 per cent, what would that do to their forecasts?”

Standard variable mortgage rates with the major banks are currently around 6 per cent after the Reserve Bank’s increase this month.

Over the long-term, Mr Christopher says house prices can only sustainably rise at a similar pace to incomes, otherwise the economy becomes vulnerable to debt-fuelled asset bubbles.

“Long-term, the market can afford house price rises that are commensurate with income increases.”

“If, on the other hand, we are seeing house price growth above and beyond annual total income growth then basically that house price increase is really only brought about by an increase in total debt, which is what we don’t want to see happen in this country.”