Australia home prices may see rise by up to 10pc

Australia's flagging property market is poised to get a boost from record low interest rates and a housing shortage that could increase prices by as much as 10 per cent this year.

The Reserve Bank of Australia has cut the cash rate by 1.75 percentage points since November 2011 to match a 50-year low, which has helped cut standard variable mortgage costs to 6.65 per cent in November, the lowest in almost two years, central bank data show. Traders are betting on a 50 per cent chance the central bank will drop the rate a quarter point to 2.75 per cent by March, interest-rate swap prices compiled by Bloomberg show.

While lower borrowing costs failed to stimulate demand last year, additional rate cuts and a constrained supply of homes will draw buyers back to the market, said Janu Chan, a Sydney-based economist at St George Bank. A decline in home prices is showing signs of moderating, with a 0.4 per cent decline last year after a 3.6 per cent drop in 2011, according to data from Brisbane-based researcher RP Data.

"The two most recent rate cuts, and all the successive ones, should continue to feed through to the economy and have an impact, particularly on housing," Chan said in a phone interview. "There's also the supply side - there's been a long period of underbuilding in various areas."

Chan predicts home prices could rise by 5 per cent to 10 per cent on average in the biggest cities, including Sydney, Melbourne and Perth this year. Her estimate is higher than those of analysts from Australia & New Zealand Banking Group and Commonwealth Bank of Australia, who predict average gains of 3.5 to 5 per cent in the cities.

The median price for homes and apartments across the eight biggest cities was A$483,000 (HK$3.9 million) as of December 31, according to RP Data. Sydney's was the highest at A$580,246, Melbourne's median price was A$500,000 and Perth's was A$479,000.