The healthy rebound in house prices is due to strong demand for housing and a slower than expected rise in the unemployment rate, economists say.

The Australian Bureau of Statistics (ABS) said on Tuesday that its house price index rose 4.2 per cent in the June quarter, well above market expectations of a two per cent increase.

The index, which measures house prices in Australia’s eight capital cities, had fallen for the previous four quarters.

AMP Capital Investors chief economist Shane Oliver said the ABS report confirmed other private sector surveys indicating house prices “have bottomed for now and are on their way back up again”.

“You can debate how strong it is going to be, but the bottom line is that with interest rates remaining incredibly low and pent-up demand for housing having increased over the past 12 months, there is potentially more upside here,” Dr Oliver said.

House prices were higher in every capital city, with the largest increases in Melbourne (up 5.2 per cent) and Sydney (up 4.9 per cent).

The smallest gains were a 2.4 per cent increase in Darwin and a 2.5 per cent rise in Brisbane and Hobart.

Dr Oliver said the rebound in house prices coincided with a slower than expected deterioration in the labour market, and a more resilient economy.

“The big negative for house prices was going to be rising unemployment, but that hasn’t been as big a deal as might have been thought six months ago,” Dr Oliver said.

“So in the meantime, the positives of lower interest rates and the first home owners boost are having a much bigger impact than would have occurred if the economic downturn had been more severe.”

Australia’s unemployment rate has risen from a 33-year low of 3.9 per cent in February 2008 to 5.8 per cent June, with the July figures due on Thursday.

The Reserve Bank of Australia (RBA) kept the cash rate unchanged at a 49-year low of three per cent at its August board meeting on Tuesday.

RBA governor Glenn Stevens said last week it was a “very real challenge” to ensure that money currently flowing into housing would encourage greater supply of affordable shelter rather than just boost prices.

“If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing,” Mr Stevens told a charity lunch.

Housing Industry Association chief economist Harley Dale said Mr Stevens’ concerns were valid, but the potential scenario was not reflected in Tuesday’s ABS report, given it showed house prices fell 1.4 per cent in the year to the June quarter.

“One quarter’s worth of reasonably strong growth does not equate to the situation that governor Stevens presented,” Dr Dale said.