Australian property prices are headed higher

Property investors are being enticed back into the market thanks to lower interest rates

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Recent trends in auction clearance rates suggest property investors are responding to recent interest rate cuts and coming back into the Australian housing market again.

Auction clearance rates in Sydney saw a 77.6% clearance rate over the weekend – following last weekend's 80.3% – the highest levels since August last year, according to Domain.

Sydney auction clearance rates May 2016
Source: Domain

That was despite a higher number of properties up for auction 573 homes versus 505 last weekend. However, auction numbers are still well down compared to the same weekend last year – when 750 homes were auctioned.

Melbourne also saw strong auction clearance rates – matching Sydney with 73.8% on Saturday, and continuing the trend from last weekend. However, there are signs that the number of homes going to auction is sinking. 744 houses went to auction on Saturday according to Domain, compared to a whopping 995 over the same weekend last year, and last weekend's 759.

Melbourne Auction clearance rates May 2016
Source: Domain

Investor activity is clearly on the rise according to Domain, with rising demand from lower-priced, higher yielding suburbs in Sydney's west. Budget and mid-priced Melbourne suburbs also continue to produce the strongest regional results.

Spurring their renewed appetite was the Reserve Bank of Australia's (RBA) decision to cut the official cash rate by 25 basis points to 1.75% earlier this month.

Most lenders passed on all or almost all of the rate cut to borrowers through lower mortgage interest rates.

Investors had been discouraged from over-borrowing last year when the banking regulator, the Australian Prudential Regulation Authority (APRA) clamped down on lending to investors which was rising above 10% annual growth early in 2015. The banks obliged, raising interest rates on investor mortgages, lowering loan-to-valuation ratios – which required investors to stump up higher deposits, and tightening lending standards and lending limits.

Foolish takeaway

APRA will be keeping a close eye on investor lending growth given the signs and particularly for Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) which dominate lending for housing in Australia.

The combination of the number of properties up for auction falling and investors coming back into the market suggests property prices are also headed higher from here.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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