Sydney’s soaring property prices are not expected to slow any time soon, possibly putting the brakes on further rate cuts from the Reserve Bank.

Prices in Sydney have grown at the equivalent of an annual pace of 25 per cent since the RBA’s February rate cut, property valuation firm Propell says in its latest housing report.

And it’s this massive growth that is holding the RBA back from another rate cut.

“Sydney remains the biggest headache of the RBA as it seeks to balance the needs for economic growth against boom conditions in Sydney,” the report said. “At the equivalent of 25 per cent per annum growth, it is too much for the RBA, which has put cash rate reductions on hold, primarily because of this market.”

A rate cut is widely expected to occur in May, but that could be delayed as the RBA tries to keep a lid on Sydney property prices, Propell said.

It expects Sydney’s market to remain white hot in 2015, with prices soaring another 15 per cent after 2014’s 15 per cent rise.

It’s a different story for the rest of the country, with price growth of just 1.4 per cent expected.

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Prices in Brisbane, Adelaide, Hobart and Darwin are no higher now than they were five years ago, the report said. “The word `boom’ only applies to Sydney”, Propell said.

Foreign investor demand is pushing prices higher in Sydney and Melbourne, and proposed new rules for offshore buyers are not expected to have an impact.

“The lower exchange rate means that for foreign buyers, Sydney prices in US dollar terms are unchanged on last year and remain attractive, while the rest of the country has gotten cheaper in US dollar terms,” the report said.

National Australia Bank economists said on Tuesday Sydney’s house price resurgence suggests the RBA’s capacity to further cut rates could be “severely constrained”.

Foreign investors had played a significant role in driving strong apartment construction approvals, with 16 per cent of new sales going to foreigners, and around 30 per cent in Melbourne, they said.

“While recent attempts to tighten foreign investment rules may slow demand eventually, the reality is that the existing approvals will be built – and contribute to the reallocation of resources from mining to the non mining sector,” they said.

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AAP

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