Growth in home lending continued to slow in July as banks and regulators moved to cap investor activity, meaning the brakes may soon be applied to booming house prices.

The value of home loans approved in July rose 1.5 per cent, with loans to owner-occupiers up 2.2 per cent, and up 0.5 per cent to investors.

Investor lending growth has slowed in recent months, with the annual rate of 16.5 per cent in July down from 29 per cent in April.

Banks hiked their interest rates for investors during July as the banking regulator seeks to set a `speed limit’ on investor lending growth of 10 per cent.

Economists therefore expect investor lending, a key driver of booming property markets in Melbourne and Sydney, to continue to slow in the months ahead.

“Lending growth is beginning to soften for investors,” St George senior economist Janu Chan said.

“Taken with lower auction clearance rates of late, the pace of house price growth will likely ease in coming months.”

Lending to owner-occupiers has been steady at an annual rate of around 14 per cent for some time, and loans to first home owners dropped in July, a further reason to expect home price growth to slow, ANZ economists Katie Hill and Felicity Emmett said.

“It seems unlikely that owner-occupier borrowing will accelerate to fill the gap left by slowing investor finance,” they said.

“While there has been a tentative lift in borrowing by upgraders in recent months, first home buyers remain subdued.”

However the Housing Industry Association warns tighter regulation of investor lending by the Australian Prudential Regulation Authority could dent the construction of new homes.

Lending to investors building new homes jumped 11.7 per cent to a record high, HIA economist Diwa Hopkins said.

“We maintain our concern about recent APRA interventions – there is a risk of disruption to new home building activity,” she said.

“New home building has been a key element to the broader domestic economy’s continual growth in recent years, but critically, it has also made meaningful headway in satisfying the housing needs of Australia’s growing population.”

By Drew Cratchley