by Su-Lin Tan

The Reserve Bank and the Australian Prudential Regulation Authority may have been surprised by the surge in housing prices in May after efforts to suppress prices in the past year but experts expect the regulators to sit tight and allow incoming housing supply to absorb the price rises.

Supply aside, the current price rise will not last as regulators are willing to step in and tighten up more lending to enforce further price cooling, economists and analysts added.

CoreLogic's head of research, Tim Lawless, said the latest uptick - which saw the national house price  rate back to 10 per cent in the year to the end of May - was "still relatively fresh and may be short-lived".

"Despite lower mortgage rates in May, lending conditions are tighter now than they were a year ago," he said.

The kick in May also marks four years of growth cycle, with Sydney dwelling values now 57 per cent higher than in May ...

The kick in May also marks four years of growth cycle, with Sydney dwelling values now 57 per cent higher than in May 2012 and Melbourne up 39.4 per cent. Wayne Taylor

"Recent data from APRA highlights that interest-only lending is now at its lowest level since March 2013 and new mortgages with a loan to value ratio to higher than 90 per cent are at the lowest reading since March 2011."

Economists share the same view that the current housing market strength will trail off for the rest of 2016, with the increase in housing supply watering down further price rises.

"The RBA will be watching this closely during forthcoming monetary policy deliberations, as the risk of overheating the housing market is one of the potential risks of lowering rates further," ANZ's Daniel Gradwell and David Cannington said.

"The Reserve Bank may be reticent about cutting rates again until there is more solid evidence that housing supply is indeed outstripping demand, causing prices to grow at a more pedestrian pace," CommSec chief economist Craig James said.

Bouncing back: home values are up again.

Bouncing back: home values are up again. CoreLogic RP Data

The annual growth prices had already slowed to 7.4 per cent in December last year.

But a number of factors, including lower interest rates – the standard variable mortgage rate is at its lowest level since 1968 – strong competition for owner occupier lending, and a bounce back in the proportion of investor lending, have given the market a new head of steam.

In May, the CoreLogic Hedonic Home Value Index rose 1.6 per cent across the capitals driven largely by 3.1 per cent growth in Sydney, compared with 1.6 per cent for Melbourne.

Canberra and Hobart also had growth of above 2 per cent and Perth was the only market to lose ground with prices retreating 2.7 per cent.

The kick in May also marks four years of growth cycle, with Sydney dwelling values now 57 per cent higher than in May 2012 and Melbourne up 39.4 per cent.

The rise in prices could also be a result of a rush in buying, buoyed by the election, but Mr Lawless warned buyers any changes to policies such as negative gearing were likely to take a year to enact, should there be a change in government.

And with the growth in investor lending slowing to 7 per cent in the past year, banks now had "scope to increase lending to investors", Mr Lawless noted.

"Anecdotal evidence suggests investor numbers may have increased further from this time, with some lenders reversing the tighter lending requirements that were previously in place for investment purposes as growth in investor-related credit tracks well under the APRA speed limit of 10 per cent a year," he said.

Investors will not be encouraged by the current level of return on housing investments, but yields on other investments such as fixed interest have also weakened this year.

Gross rental yields for housing investment fell to a record low in May, according to CoreLogic.

With rents increasing just 0.7 per cent across the country in the first five months of the year, the average gross rental yield across the capital cities is just 3.4 per cent.

For Melbourne houses the figure is just 2.9 per cent, and Sydney has the lowest gross yields for apartments at just 4 per cent.

Houses are also performing much better than apartments. For the month, house prices rose 1.8 per cent, and 3.6 per cent in Sydney, compared with 0.1 per cent for apartments, including 0.7 per cent in Sydney.