Australian capital city home prices surged 1.4 per cent in September, however they have not yet recovered the falls of the previous year.

Last month's home price rise across Australia's eight capital cities was the largest in two-and-a-half years and comes on the back of 125 basis points of rate cuts over the past year.

The RP Data-Rismark home value index shows the price gains were strongest in Adelaide (2.4 per cent) but then broadly spread against the other big capital cities which posted gains between 1.6 per cent (Perth) and 1.1 per cent (Brisbane).

Prices in Hobart and the territory capitals all went slightly backwards in the month, while regional houses fell 1.2 per cent, although those rest-of-state figures only run to the end of August.

RP Data's research director Tim Lawless says the improvement in capital city home prices, which are now up 2 per cent over the past three months, is largely due to interest rate cuts.

"It’s no coincidence that housing market conditions bottomed out at the end of May after the Reserve Bank cut the official cash rate by 50 basis points," he said in the report.

"A further cut of 25 basis points in June and the anticipation of further rate cuts in the pipeline appear to have instilled renewed confidence in the housing market which has driven the growth in home values."

However, Mr Lawless says the strength in home prices generated by the rate cuts is likely to weigh against the Reserve Bank making further reductions.

"This renewed strength in the housing market is likely to be one of the key deliberation points when the Reserve Bank meets today," he said.

"The bank will want to keep a lid on housing prices from a financial stability perspective, while at the same time ensure interest rates are low enough considering the decline in commodity prices and Australia's terms of trade."

Rismark chief executive Ben Skilbeck says mortgage interest rates are now at or even below levels seen during the global financial crisis, when the RBA slashed official rates to 3 per cent.

"Borrowers can currently avail themselves of three-year fixed rates as low as 5.39 per cent, which is below the three-year fixed rate lows recorded by the RBA's indicator lending rates of 5.6 per cent during the GFC," he said.

"If the RBA cuts rates further today, such monetary policy could ignite house price growth in excess of the growth in household disposable incomes.

"It's not too long ago that we saw the impact of historically low interest rates on house prices. Over the two-year period ended December 2010, the national house price index increased by more than 20 per cent."