Fear of rate rises to dampen growth

While this growth seems moderate, it is a far cry from the 14 to 20 per cent growth enjoyed in 2007.

RP Data’s research director Tim Lawless said interest rates are likely to be the primary deterrent of housing market performance over the coming year.

“The interest rate futures market is not pricing in a full rate hike until March 2012,” Mr Lawless said.

“While that seems optimistic, if borrowers only have to wear one rate hike between now and March 2012 Australian dwellings have a good chance of realising higher than expected capital gains.

“A long-term pause in interest rates would be welcomed by all segments of the housing market,” he said.

If the Reserve Bank raises rates several times in 2011, however, dwelling values would struggle to obtain much forward momentum, mirroring the property price growth achieved in 2010.

According to RP Data’s hedonic Home Value Index, dwelling values rose by 4.7 per cent during the 2010 calendar year across the capital cities combined.

Almost all of this growth occurred during the first quarter when dwelling values grew by 3.6 per cent, compared with just 0.4 per cent growth in the December 2010 quarter.

Capital growth was for the most part uninspiring, but some investors managed to benefit.

Rising interest rates discouraged home buyers from climbing onto the property ladder, in turn, creating a tight rental market and sending rental rates up.

Nationally, gross yields for apartments and houses were 4.7 per cent and 4 per cent respectively in 2010.

The most attractive apartment yields are found in Darwin (5.7 per cent), Brisbane (5.3 per cent) and Sydney (5 per cent).

Melbourne and Perth currently have the lowest apartment yields, with returns of just 4.1 per cent and 4.3 per cent respectively.