A recovery in the residential property market in Australia is well underway with prices increasing by an average of 3.3% in the last quarter, according to the latest published figures.

The data from the Australian Property Monitor shows that in the second quarter of the year house and apartment prices recorded their strongest quarterly growth since December 2007 and that Brisbane and Perth are the only cities where prices are now below June 2008 levels.

Darwin has seen the strongest recovery with average prices up 20% in the last 12 months. Melbourne saw a 5.8% increase in the last quarter and Sydney prices were up 3.7%.  'The consolidation that began in the March 2009 quarter has now transformed into strong growth across the country,' said APM economist Matthew Bell.

He added that while low interest rates, flat prices and first-home owner grants supported the affordable end of the market through the end of last year and early this year, it's the upper end of the market that's driven the strong growth in the major capitals in the June quarter.

In Sydney, Melbourne and Brisbane average prices in the top 50% of suburbs grew by nearly double the rate of those of the bottom half. 'We've had that top end of the market, those more expensive properties, come back in a big way particularly for these cities,' explained Bell.

But some buyers are still cautious with one eye on their jobs and the other on interest rates and this is shown by the fact that there has been an increase in the number of apartments being sold compared with houses in all state capitals and especially in Sydney.

Some analysts believe that even those buying apartment might become even more cautious. According to analyst Michael Matusik property investors buy close to 75% of all new apartments, but they now need bigger deposits to do so with 20% often the minimum and sometimes 25 to 30% required.

Growth in rents is also slowing and Matusik says he can't see investors rushing back into the new apartment market. He says most new units sold recently have been substantially discounted, often below replacement cost.