Australia home prices up 1.6% in July

SYDNEY (Reuters) - Australian home prices rose in July for a second consecutive month led by strong gains in Melbourne, putting paid to recent talk the market was running out of steam and due for a large correction.

Figures from property consultant RPData-Rismark showed dwelling prices in Australia's major cities rose 1.6 per cent in July, from June when they climbed 1.4 per cent.

Prices were 10.2 per cent higher than in July last year, picking up slightly from June's pace of 10.1 per cent.

Melbourne boasted the biggest gains in July, with a 3.7 per cent rise, while home prices in Sydney rose 1.5 per cent. On the year, Sydney was 14.8 per cent higher, followed by an 11.0 per cent increase for Melbourne.

Rising home prices have been welcomed by policymakers as necessary to encourage a much-needed revival in home building, which is indeed underway.

RP Data research director Tim Lawless said the housing market should record further capital gains with interest rates remaining low and fixed rates falling further.

Australia's major banks recently cut three- and five-year fixed-rate mortgages to record lows below 5.0 per cent, even with the Reserve Bank of Australia (RBA) expected to hold its cash rate steady at 2.5 per cent for some time yet.

However, Lawless said home price growth was tapering in trend terms back to a more sustainable level.

Over the past six months, capital city dwelling values grew 3.7 per cent, down from the peak growth rate of 7.2 per cent seen over the six months ending November.

Over a similar time frame, growth in mortgages has also started to ease, suggesting buyer demand may be dampened by affordability issues and low rental yields in the largest cities.

"The real litmus test for the market will be how much buyer demand is apparent during the Spring selling season," Lawless said.

"Winter has seen above-average auction clearance rates. However, as listings inevitably rise sharply over the coming months this will create the greatest test for the Sydney and Melbourne housing markets in terms of how strong value growth will be."