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Sydney and Melbourne house prices will soon be growing at double-digit rates

By year’s end, a combination of tighter credit and improved supply will mean price growth will come back a little but will still be 7 per cent in Sydney and 9 per cent in Melbourne.

ANZ senior economist Felicity Emmett said the property markets of the two cities were re-bounding much quicker than expected.

“Auction clearance rates bottomed out in December and have been rising since. But the improvement became much more marked from May onwards,” she said.

“The change in sentiment was driven by the combination of lower rates, easier access to credit, and increased certainty around housing taxation. Together, these factors have helped to shift sentiment from one of pervasive negativity to broad optimism.”

The Reserve Bank restarted interest rate cuts on June 5. Since then, dwelling values as measured by CoreLogic have increased by 7.2 per cent in Sydney and 7 per cent in Melbourne.

The lift in prices, however, will come at a longer term cost with household debt levels likely to increase while affordability will fall.

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“As prices recover, we expect affordability, particularly in Sydney and Melbourne, to decline,” Ms Emmett said.

Financial markets have pushed back expectations the Reserve Bank will cut interest rates this year.

RBA Governor Philip Lowe, speaking in the United States on Friday, suggested taking rates any lower would fail to deliver major economic benefits and probably feed into prices for assets like housing.

“In my view we’re now clearly in the world of diminishing returns to monetary easing,” he said.

“If that’s right, then the solution to the problem lies elsewhere. That’s creating an environment that encourages investments.”

“Without progress on this front, the main effect of lower interest rates is to push up the price of existing assets, rather than encouraging investments in new assets, which is what’s needed.”

Dr Lowe downplayed suggestions the bank had a “lot more work” to get the economy growing at trend and inflation back within the RBA’s 2-3 per cent target.

“The economy has been through a very soft patch over the past year but it is actually gradually improving, the lower interest rates are working,” he said.

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