House prices are expected to rise substantially in 2020, led by double-digit annual gains in Sydney and Melbourne, according to a new report from analysts at SQM Research.

Key points: SQM is forecasting home price gains of up to 17pc in Melbourne and 16pc in Sydney next year

SQM is forecasting home price gains of up to 17pc in Melbourne and 16pc in Sydney next year But those forecasts depend on an improving economy and no new regulatory restrictions on home lending

But those forecasts depend on an improving economy and no new regulatory restrictions on home lending Most other capital cities are expected to have low to mid single-digit price increases in 2020

Under the scenario that SQM's managing director Louis Christopher thinks is most likely, price movements are tipped to range from a continued fall of up to 5 per cent in Darwin to an increase of up to 15 per cent in Melbourne.

This scenario is one where interest rates remain steady, the economy improves and bank regulator APRA does not intervene with lending restrictions to slow down a runaway housing market in Australia's two biggest cities.

The price rises could be even stronger if the Reserve Bank does cut interest rates again, as is currently forecast by most economists and priced in by financial markets.

In that scenario, prices in Melbourne would rise 12 to 17 per cent, predicted Mr Christopher, with Sydney just behind at 11 to 16 per cent.

Under both of those scenarios the other capital cities are tipped to post moderate growth, ranging from 1 to 4 per cent in Adelaide, 3 to 7 per cent in Perth and Brisbane, 5 to 9 per cent in Hobart and 3 to 8 per cent in Canberra.

Mr Christopher said Sydney and Melbourne would see the rapid property price increases of recent months continue into 2020, and would pass their previous house price records of 2017 sometime before the end of September.

"Strong population growth rates, easier access to housing credit and continuing stability from their local economies will provide the fuel for this new upturn," he explained.

Boom uncertain and unlikely to last

However, he does not think the current boom will be as sustained as the one that lifted prices by about 75 per cent in Sydney and two-thirds in Melbourne between 2013 and 2017.

"For starters, Sydney and Melbourne have bottomed out at an overvalued point on our measurements. This will stretch those who are buying into this new cycle like never before," he cautioned.

"It is likely the new upswing will end in the same way the last boom ended — with APRA placing additional lending restrictions on the market."

In fact, Mr Christopher said regulators — especially the Australian Prudential Regulation Authority, policymakers and the Federal Government have unprecedented power over the direction of housing markets at the moment.

"APRA has proven itself to be a major conductor of Australian dwelling price movements since 2015," he observed.

"Arguably, it currently has more influence on the housing market than the RBA does.

"Australian property buyers may find the cost of lending to be cheap, but if they cannot get a loan from the bank, that obviously hurts the housing market, given most home buyers need finance."

Mr Christopher said the prospect that regulators may become concerned about the house price boom earlier than he expects could cut any 2020 property price bounce short.

Under his third scenario, APRA intervenes by mid-2020, limiting property price gains in Sydney and Melbourne to 8 and 9 per cent respectively, with smaller effects on the other capitals.

A fourth scenario is where the economy weakens and the Reserve Bank keeps cutting interest rates before turning to quantitative easing.

Despite the cheaper loans this would create, Mr Christopher said it would result in home prices falling again over the second half of next year.

Louis Christopher's property price forecasts for 2020. ( Supplied: Louis Christopher )

Sydney and Melbourne already massively overvalued

Mr Christopher is forecasting Sydney and Melbourne prices to jump, even though he said both cities were still very overvalued, despite the price falls of the past two years.

SQM estimates that Melbourne is 27 per cent overvalued relative to its economic conditions, Sydney 21 per cent, Brisbane 6 per cent and Adelaide 4.7 per cent.

On the other hand, Hobart and Darwin are slightly undervalued, while Perth is estimated to be 10 per cent undervalued.

But, while Sydney and Melbourne are still very expensive, Mr Christopher pointed out that in all the other capital cities properties can be found that are now offering gross rental yields that are higher than current record low home lending rates — in property investing jargon, they are cash flow positive.

"I have not seen such a phenomenon in my career," he said.

"As a result, we may see an increase in SMSFs (self-managed super funds) investing into residential property over the course of 2020."