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Australia home prices' long decline pauses on rate cut prospects

[SYDNEY] Australian home prices saw a tantalising hint of stability last week as the hard-hit market drew support from the prospect of lower mortgage rates and a continuation of tax breaks for property investing.

A pause in price declines would be welcome news for the entire economy since sliding prices have been undermining confidence and consumer spending power.

Australia's housing stock is valued at A$6.8 trillion (S$6.47 trillion), or almost four times the country's annual gross domestic product.

Data from property consultant CoreLogic out on Monday showed home prices in the capital cities edged 0.1 per cent higher last week, breaking months of steady declines.

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Sydney saw prices rise 0.3 per cent for the week and Melbourne firmed 0.1 per cent, again the first increases in months.

Values were still down for the month but a sharp rise in auction clearance rates to 62.6 per cent, spoke of improving demand.

"Auction markets posted their best results since April last year with preliminary clearance rates nearly hitting 70 per cent in Sydney and just under 63 per cent in Melbourne," said Matthew Hassan, a senior economist at Westpac.

The market was helped by expectations of falling mortgage rates after the head of the Reserve Bank of Australia (RBA) said a rate cut would be considered at its next policy meeting on June 4.

The futures market implies an 84 per cent probability of a cut next week and is fully priced for a move to 1 per cent by October. Indeed, investors have priced in a real chance of reaching 0.75 per cent by the middle of next year.

Australia's banking regulator added to the uplift by proposing to relax rules for how banks check people's ability to service home loans, essentially allowing them to borrow more.

Also likely aiding sentiment was the surprise election victory of the conservative Coalition government on May 18 and its pledge to keep tax breaks for home investment.

The opposition Labor Party had campaigned on removing or curbing certain perks.

"The extent to which this generates a recovery in housing markets remains unclear," cautioned Westpac's Hassan. "While the initial response is positive, it remains to be seen how much 'follow through' the move has."

Economists, including those at AMP and Citibank, have scaled back estimates for how far prices may ultimately drop. Property and mortgage brokers who spoke to Reuters last week said they have seen a noticeable jump in customer inquiries, including from those buying a home for investment.

REUTERS