Residential property prices in Australia have made a strong start this year, defying the threat of rising interest rates although a new survey indicates they are getting too high for first time buyers.

Melbourne and Adelaide are leading the surge, recording increases of up to 4.3% in January while nationally real estate prices grew 1.8% during the first month of the year. It means that in the last 12 months prices have jumped 11.8%, the figures from the latest RP Data index show.

In Sydney prices increased just 1.7%, Brisbane 1.8% but in some places prices fell, most notably in Perth where they were down 0.6%, the figures also show.

Overall prices continue rising despite Reserve Bank rate increases in the last five months and additional increases from the banks that lifted the average mortgage rate from 5.8 to 6.65%.

'Buyers are for the time being outweighing sellers and new supply is being quickly consumed. Auction volumes are higher than at the same time last year and the national weighted clearance rate last week was a very healthy 73%,' said RP Data's head of research, Tim Lawless.

Rising house prices have pushed down the return for investors, with the gross rental yield for houses nationally falling from 4.7% in January last year to 4.2% this year. The rental yield for apartments dropped from 5.3 to 4.9%.

'With rental demand likely to be higher during 2010 due to continuing strong migration and fewer first home buyers, we anticipate that rents, and consequently yields, will improve over the year,' Lawless said.

The number of renters could swell this year as a new survey shows that a fifth of Australians will give up on their dream of buying their first home in the next two years if mortgage interest rates keep rising to 8 or 9%. They are currently 7%.

The survey from Australia's biggest home loans broker Mortgage Choice, found that aalthough a large portion, some 28%, of first homebuyers are prepared for rate rises, a significant proportion say they'll back out of buying if rates increase by up to 2%.

It also shows that tighter lending criteria is forcing all borrowers, not just first home buyers, to meet tougher requirements such as providing evidence of genuine savings over consecutive months. The majority of first homebuyers to be are taking this advice on board and saving good sized deposits before purchasing.