Update Australians took out fewer home loans in August, a second monthly drop in a row, as demand from first-home buyers faltered ahead of the reduction in the Federal grant boost.

The amount of borrowing for investment in houses rose. Overall, Australian home loans dropped 0.6 per cent, seasonally adjusted, the Australian Bureau of Statistics said today, slightly weaker than the 0.5 per cent drop tipped by analysts.

Investment lending, however, increased by 7.6 per cent in the month, indicating that investors are returning to real estate as a place to make money.

"Investors are flooding back into the housing market," said JP Morgan's economist Helen Kevans in a note to clients.

Loans to investors made up 27 per cent of all loans issued in August, up nearly 2 percentage points in July.

Analysts will be studying the strength of the housing market in the wake of yesterday's interest rate rise by the Reserve Bank.

House prices have risen in most cities this year, fanning concerns by the central bank that another bubble might be forming.

The big four commercial banks - Commonwealth Bank, Westpac, ANZ and National Australia - are expected to announce soon how much of the rate increase they plan to pass on to their borrowers.

The four control about 85 per cent of the mortgage market. RBC Markets economist Su-Lin Ong said the weaker home loans have "limited implications" for rate rises.

"Indeed, a key reason for beginning to lift rates is an increasing concern from the RBA that asset prices - read housing - are rising firmly while first-home owners risk overextending themselves on the assumption that a 50 year low in mortgage rates is the norm," Ms Ong said in a note to clients.

"We suspect that the RBA will be pleased to see an easing in appetite for housing finance, particularly from first-home owners."

"This is likely to keep them on the path to 4.50 per cent by mid 2010," she said, referring to the RBA's cash rate. The central bank raised the rate to 3.25 per cent yesterday, from 3 per cent.

Investors are now rating a further interest rate increase when the RBA board next meets on Melbourne Cup Day - November 3 - as an 81 per cent chance, according to Credit Suisse.

The bank's rate gauge also indicates rates are expected to rise to 5 per cent in 12 months' time - equivalent to seven more quarter-point rate rises by then.

First-home drop

The number of loans for first-home buyers as a percentage of total home loans fell in August, decreasing from 25.3 per cent in July 2009 to 24.7 per cent in August 2009.

The grant boost for buyers of existing homes was cut at the end of September, giving the new home buyers $14,000 - down from $21,000.

 Buyers of existing homes are eligible for only $10,500, down from $14,000. The reduced boost remains in effect until the end of 2009, with the Federal Grant for $7000 still in effect afterward.

JP Morgan's Ms Kevans agreed that the RBA would probably welcome a moderation in demand in the market for home loans.

"Indeed, RBA officials recently flagged the risks associated with excesses forming in the housing market, particularly at the lower end of the price spectrum."

"Governor (Glen) Stevens recently highlighted the risk that increased housing demand may simply push up prices, without creating enough new dwellings," Ms Kevans said.

"Considering the chronic shortage of housing supply in Australia, this would, in the words of the Governor, create more 'risks of problems of over-leverage and asset price deflation down the track.'''

czappone@fairfax.com.au