During the downturn that lasted almost two years, property prices fell about 15 per cent in Sydney and 11 per cent in Melbourne.

Since then, access to cheap money combined with house hunters competing over limited stock have helped drive prices higher, by about 3.2 per cent in Sydney and 3.4 per cent in Melbourne in the last four months, CoreLogic's monthly price index is expected to show on Tuesday.

Property values increased 1.6 per cent in Sydney and 1.4 per cent in Melbourne in August, following much milder growth in June and July.

The Australian Prudential Regulatory Authority loosened lending restrictions after the federal election in May after tightening the policy in 2014 and 2017.

That move, coupled with interest rate cuts from the Reserve Bank and tax refunds for low to middle-income earners, has resulted in the housing market "building a floor," says Michael Knox, economist at Morgans.

Macquarie senior economist Justin Fabo is expecting "quite strong" house price rises, particularly in Sydney and Melbourne "as interest rates decline and many households can borrow a lot more". He stopped short of using the term "bubble".

UBS is pencilling in a 5 to 10 per cent rise in house prices year-on-year for the coming 12 months, an increase it describes as a "mini-boom".

But higher house prices now represent a "material risk" and will probably limit the Reserve Bank's willingness to cut again. "We think regulators stand ready to use macroprudential tightening and consider further measures in the future should circumstances change," UBS economist Carlos Cacho says.


Westpac is expecting house prices to rise by about 12 per cent in Sydney and Melbourne by the end of 2020 from the lows of May 2019.

Tim Toohey, an economist at Yarra Capital, warned that house prices could hit bubble territory in the medium term.

"The impact of marginal shifts in interest rates upon asset prices can never be finely calibrated. It is possible that, should the RBA decide to cut a further 50 basis points in concert with renewed competition in the provision of finance, increased investor activity and a shift in demand by foreign buyers, house prices could accelerate at an uncomfortable pace," the economist says.

Partial correction

In his view, the August upswing in house prices is unfortunate, as "the partial correction of simple aggregate ratios such as house prices to household income and house price to rents that had occurred over the past year without significant damage to the broader economy was as good as an outcome that policymakers could have hoped for".

A few more quarters of modestly lower house prices and moderate income growth could have given the economy a bit more of a buffer against an expected contraction, he says.

Tony Morriss at Bank of America Merrill Lynch takes the view that sharp price gains without new supply could lift house prices and increase household debt levels.

"This might ultimately crimp broader consumption and increases the risk of bad economic outcomes if the labour market weakens materially," he warned.


But Sarah Hunter from BIS Oxford Economics is not expecting the current pace of house price gains to be sustained; rather, she's expecting a moderate increase over the next year.

“The recent bounce back in house prices in Sydney and Melbourne looks like it’s a result of limited supply and a move by owner-occupiers to enter the market," the economist says.

"Improved market conditions will encourage sellers into the market, while slow-growing household income will limit how much buyers can borrow, even when the impact of cash rate cuts and the loosening of lending rules by APRA are taken into account."

Subdued recovery?

AMP Capital chief economist Shane Oliver is also counting on a subdued recovery.

"Our assessment remains that after a further bounce price gains will be constrained through next year due to still tighter lending standards, unit supply, slow growth and rising unemployment," Dr Oliver said.

Barclays Bank economist Rahul Bajoria has the view that prices are stabilising at very low levels and the price increases already observed shouldn't trouble the central bank. “At this point, housing bubble concern should not reduce easing requirements,” he said.

Andrew Boak, chief economist for Australia and New Zealand at Goldman Sachs, says higher house prices are not a bad thing given the relationship to spending.

"We would welcome it given it would support household consumption and residential construction over time, both of which have been very weak in recent quarters," he says.

"That said, we are not particularly optimistic about the political system's ability to deal with the housing affordability issue in Australia, which becomes more of an issue during price upswings."