Home lending rose 1.7 per cent to $32.4 billion in May as banks cleared a backlog of loan applications.
The figures came a day ahead of a Reserve Bank board meeting which is widely expected to lift the cash rate.
The Australian Bureau of Statistics said on Monday the value of owner-occupier housing loan commitments rose 2.1 per cent to $21.18 billion in May.
Borrowing for investors rose 0.9 per cent to $11.18 billion.
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Owner-occupier loans rose across most states and territories, the largest being Victoria (up 6.1 per cent), Queensland (up 2.5 per cent) and South Australia (up 2.8 per cent).
Western Australia fell 3.3 per cent and the Northern Territory fell 7.3 per cent.
The number of new loan commitments to owner-occupier first home buyers rose 2.3 per cent – 31.6 per cent lower compared to the same time last year.
But new loan commitments to owner-occupier first-home buyers remained 6.9 per cent higher than February 2020 levels, prior to pandemic stimulus.
BIS Oxford Economics’ Maree Kilroy said with credit availability now in “clear retreat”, growth was not expected to continue.
In other ABS data, the total number of dwellings approved rose 9.9 per cent in May, following a 3.9 per cent fall in April.
The rise was driven by approvals for private sector dwellings excluding houses, which rose 32 per cent.
Approvals for private sector houses fell 2.7 per cent in May, following a 0.2 per cent fall in April.
Across Australia, the number of dwelling approvals rose in WA (38.7 per cent), Tasmania (26.8 per cent), Queensland (20.9 per cent) and NSW (4.7 per cent).
Dwelling approvals fell in South Australia (-21.3 per cent) and Victoria (-6.6 per cent).
The value of total residential building increased by 5.6 per cent, comprised of a 5.9 per cent rise in the value of new residential building approved and a 3.8 per cent increase in the value of alterations and additions.
Ms Kilroy said households faced higher interest rates and building costs which would drag on new housing demand.
“A higher dropout rate is also anticipated, with a significantly greater share of approved dwellings not making their way to completion.”
The Reserve Bank is expected to hike the cash rate to 1.35 per cent when it meets on Tuesday.
Capital Economics’ Ben Udy expects a 50 basis points rise, following a similar rise in June.
RBA governor Phil Lowe said in a recent speech the level of interest rates was still very low for an economy with low unemployment and experiencing high inflation.
The RBA expects inflation to peak at seven per cent towards the end of the year rather than the six per cent predicted in May.
The latest Melbourne Institute inflation gauge published on Monday fell to 0.30 per cent in June from 1.10 per cent in May.
The central bank wants inflation to return to its target band of two to three per cent.
Another 50 point hike is expected in August following the release of second quarter inflation data.
Australian National University RBA shadow board chair Timo Henckel said there was little option for the Reserve Bank but to lift rates, due to domestic and global factors.
“The challenges for the global economy are not going away any time soon: commodity shortages, high energy prices, inflation, disrupted global supply chains, the Ukraine war, COVID-19 and natural disasters,” Dr Henckel said.
“Most OECD central banks are expected to lift policy rates by substantial amounts in order to curb inflation. In this environment it will be difficult for the RBA not to follow suit.”