House prices made a modest recovery in all capital cities in the last quarter of 2005, indicating that the housing market could be on the mend.
But it is unlikely the result will alter the central bank's stance on interest rates.
The Australian Bureau of Statistics' (ABS) house price index rose 2.1 per cent in the December quarter, compared to a flat result in the September quarter.
In the year to December, the house price index increased 2.3 per cent.
The largest quarterly rise in house prices was a 6.6 per cent increase in Perth, followed by Darwin which climbed 6.1 per cent, while Melbourne added 2.3 per cent and Brisbane climbed two per cent.
Sydney house prices recovered from a 2.3 per cent fall in the September quarter to rise just one per cent in the fourth quarter.
But in the year to December, Sydney was the only capital city to be in the negative, falling 3.9 per cent.
UBS chief economist Scott Haslem said despite the negative year end result for Sydney, in looking across all the states and territories, there is a sense that the housing sector is stabilising.
Perth and Darwin house prices continued to power ahead, vaulting 22.5 per cent and 23.2 per cent, respectively, in the year to December.
"Both Perth and Darwin have very strong gains which are continuing to be buoyed by the commodity price cycle," said Mr Haslem.
Mr Haslem said housing seems to be on the mend in terms of sales and construction activity but he was not convinced that would lead to an uplift in price action this year.
"I certainly think increased lending, modestly improving affordability and declining vacancy rates mean that the chances of seeing another leg down in the housing sector over the next six months seemed to have been significantly reduced," he said.
Macquarie Bank analysts said any signs of a revival in the housing sector would lesson one of the four major downside risks to the growth outlook and keep alive the chances of higher interest rates at some stage in 2006.
But Mr Haslem said with Australia's "rebalancing middle of the road economy" and with inflation currently sitting at 2.8 per cent, interest rates are not likely to move in the near future.
Interest rates were left on hold earlier this month at 5.5 per cent.
