A recovery in the overall Australian property market by next year will only take place if interest rates fall, according to a new report.

SQM Research's National Uutlook Report, published today, argues that there will be a decrease in property values in all cities during the 2011 calendar year. The report's author, SQM managing director Louis Christopher, argues that Perth is likely to record the largest drop in house prices and Canberra the least. He ads that, while Sydney property prices are expected to do relatively better than prices in other cities, the losses are mounting in Brisbane, Melbourne and Darwin, with all of these having come off recent strong runs.

Christopher's outlook for 2012 is also bearish. He predicts that, if there is a 25 basis point cut in official cash rates, prices would likely bottom out and even post modest gains in some cities, as the property downturn eases and confidence begins to return to the market.

However, if rates are left on hold, house prices are likely to keep falling well into 2012 with no market bottom until at least the middle of the year. If rates we to rise by just 25 points, either this year or next, house price declines would accelerate throughout the course of the year.

“We have made forecasts based on three scenarios for interest rates. Our base case scenario is that interest rates are unlikely to change in the immediate future," said Christopher. “If interest rates do remain unchanged through to June 2012, then the accumulated peak to trough declines for most Australian capital cities will reach double digits by the end of that calendar year.

“It’s clear to us that this current housing downturn is starting to build some momentum which is going to be very difficult to stop without some kind of stimulus from either the RBA or the federal government.”

Christopher's predictions for the capital cities, assuming interest rates remain as they are, are as follows:

Perth: -2 to -4%

Brisbane: -4% to -7%

Darwin: -4% to 7%

Melbourne: -5% to -7%

Sydney: 0% to 4%

Adelaide: -4%-6%

Hobart: -2% to -4%

Canberra: 2% to 4%