luxury Home prices rise....

House prices are rising at the fastest pace in six years but rising interest rates could halt the boom, experts have warned.

Nationally, house prices rose by 3.7 percent in the three months to September alone and have already gained by 7.1 percent this year, according to Australian Property Monitors (APM).

Melbourne and Hobart saw the biggest growth in house prices in the last three months, with prices rising by 6.1 percent and 5.4 percent respectively, while Darwin saw the biggest rise in apartment prices, up 11.9 percent.

AMP economist Matthew Bell said the gains had been powered by a recovery in sales at the luxury end of the market and by owners who sold property to the rush of new first home buyers, who are now upgrading.

"The extraordinary recovery at the upper end of the market experienced in June in most major capitals has now spread to the rest of the country," he said.

"In addition, sellers who sold properties into the booming first home owner market over the past year have used sale proceeds to upgrade to more expensive homes and units, placing even more pressure on upper end markets."

However, APM cautioned that rising interest rates could pose a threat to continued growth in house prices.

Economists are expecting the Reserve Bank of Australia to raise interest rates several times in the coming months with rates likely to rise by 25 basis points following the RBA’s meeting next Tuesday.

Many predict the cash rate will be around 5.5 percent by the end of 2010 and there are fears that some, particularly first home buyers who entered the market amid record low rates and government incentives, may have over committed themselves.

"Despite this, we expect that strong rental yields and the prospect of future capital gains are enticing many investors to enter the market in the second half of 2009 and early 2010," Mr Bell said.

He added that rates would be a crucial factor in whether price growth continues.

"While the explosive growth seen in the upper end of the market is expected to slow as prices reach and exceed their late 2007 highs, moderate to strong growth is expected across the market as a whole for the remainder of 2009 and 2010," he said.

"The question as to whether this growth can be sustained throughout 2010 depends on how quickly mortgage rates rise in the next six months."

Australians will get further insight into house prices tomorrow when APM rival RP Data publishes its monthly house price index.

Supplied by ninemsn.com.au 29th october 2009