A recent forecast from research house BIS Shrapnel’s Residential Property Prospects report – based on data from the Real Estate Institute, predicts that Melbourne house prices will rise by nearly 20 per cent over the next three years, buoyed by the “current heat” in the market surrounding first home buyers.

Angie Zigomanis said activity in the lower end of the market – buoyed by the boost to the first home owners grant and low interest rates – were generating “green shoots” of recovery.

The report says average house prices in most capital cities will grow by between 11 and 19 per cent over the next three years. In real terms (where prices are adjusted for inflation) the level of percentage growth is about half.

Mr Zigomanis, who said actual prices were more indicative than prices adjusted for inflation, predicts the boost to the first home owners grant combined with low interest rates would kick start further activity in the “upgrading” market.

“If the first home buyers are in the market buying, someone is selling it to them,” he said.

“We’re expecting that increased first home buyers activity to lead through to stronger upgrading demand for people upgrading to their next property,” he said.

Mr Zigomanis said once the (boost to the) first home owners grant expires, and first home buyers drop back out of the market, there’s enough activity in the market so it becomes self-sustaining.

The boost to the first home owners grant will finish at the end of this year.

But the research, based on Real Estate Institute data, said house prices would remain relatively stagnant until unemployment peaked around June 2010.

“Everything’s pointed at people jumping in the market”.

“At the moment we’re dealing with a confidence issue,” he said.

Weak economic growth and rising unemployment meant Australians were hesitant to jump into the market, he said.

The Government forecast in its May Budget that unemployment will rise to 8.5 per cent by mid-2011, leaving one million Australians out of work.

BIS Shrapnel predicts unemployment to peak “somewhere between 7 and 8 per cent” mid next year.

Mr Zigomanis said unemployment would impact house prices “more so from a confidence perspective”.

“Those people who have the means to buy property, and still have a job to buy property, they may be concerned about their employment outlook,” he said.

Melbourne Prediction:

• Median house price $425,000 in June 2009-06-12
• A fall of 6 per cent for the financial year
• Pick up in “upgrader” activity expected
• Nearly 20 per cent increase in prices to 2012