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While first homebuyer activity continues to fuel strong demand for housing finance, the investor market remains sluggish, according to a new report.

The Australian Bureau of Statistics showed that the number of housing loans surged by 0.4% to an 11-month high. First homebuyers accounted for more than a quarter (27%) of the mortgages taken - the highest on record.

"First homebuyers continue to be a major component of the recovery in housing finance," said Harley Dale, chief economist with the Housing Industry Association. "However, while trade-up owner-occupiers are signalling modest improvement in new home building activity, the investor market continues to languish."

Harley noted that lending for investment in new residential construction dived by 12% in February, falling by 49% on a year ago. "This is a signal that tight rental market conditions are likely to persist throughout 2009," he said.

Craig James, chief economist with CommSec, pointed out that the strong buying demand on the limited supply in the market is likely to boost prices.

"The main problem for first homebuyers is that there are so many people in the market at present competing for the limited supply of houses and land. Super-low interest rates and the government grant have substantially boosted purchasing power, but the only problem is that the strong demand is pushing up prices. What the housing market needs at present are more investors and developers. Unless more houses and apartments are built, the surge in buying interest by owner-occupiers may only result in higher prices."

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