With a property index showing a +3.7% rise in real estate prices, The Reserve Bank of Australia is expected to increase interest rates as residential property prices are now at a six-year high despite a fall in first time buyers.

Figures from the Australian Property Monitors (APM) showed that Melbourne has grown the fastest with prices increasing by +6.1% in Q3 2009, the biggest increase since 2003. The average house price in Melbourne in September was $487,249, compared to $437,560 in September 2008 which is a +11.4% rise in 12 months. Hobart had the second highest rise, up +5.4% for the quarter, followed by Canberra with +4.8% rise and Sydney with +3.6%.

According to APM, he rise in national house prices was led by explosive growth in the more expensive suburbs, which had started in capital cities and spread to the rest of the country.

Prices in Sydney’s eastern suburbs and lower north shore had been rising since June while prices in some expensive suburbs, such as Point Piper and Bronte in Sydney, had taken the hardest hits, falling by up to 30% since 2007, according to the index.

Some experts are warning that the upturn in the market is not sustainable as it is not underpinned by first time buyers.