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HOUSE prices in Melbourne surged by a record 25% last year, adding to the miserable outlook for first home buyers and fuelling renewed political debate over housing affordability.

A report to be released today reveals that Melbourne's median house price grew faster than in any other Australian city in 2007, jumping by almost $100,000 to $463,488 and closing in on the prices in Sydney and Perth.

Shrugging off successive rises in interest rates, Melbourne apartment values also soared, with the median price rising by almost 15% to $335,088.

Renters were not spared either, with the Bureau of Statistics reporting that Melbourne rents jumped 5.4%, the biggest annual rise since 1991.

The figures come after a report this week showed Melbourne real estate to be among the most unaffordable in the English-speaking world, with more than seven times the median annual wage required to buy a typical house, compared with as little as three times in some parts of the United States.

The Demographia housing affordability study, which surveyed more than 220 cities, named Melbourne the 22nd most expensive.

"If you don't already own a home in Melbourne, things are looking extremely bleak," said Michael McNamara, general manager of Australian Property Monitors, which conducted the latest survey of house prices.

He said the price surge had been skewed by the strong performance of expensive suburbs such as Malvern, Toorak, Armadale and Brighton, which had annualised growth of almost 50%.

But current rates of growth in property prices were unsustainable, McNamara said, with increased economic uncertainty and official interest rates tipped to rise again next month.

Apart from Melbourne, the other strongly performing markets last year were Brisbane (up 20.1%), Adelaide (20%) and Canberra (14.6%). Sydney's median house price went up only 4.8%, but it remained the most expensive in the country at $553,357.

Figures to be released by the Real Estate Institute of Victoria tomorrow are expected to confirm Melbourne's booming market and declining affordability.

Premier John Brumby named affordability as a key priority when he took power last year and appointed Planning Minister Justin Madden to oversee a new Department of Planning and Community Development. Mr Madden's brief is to manage development in Melbourne's outer suburbs as the city booms and struggles to house almost 1000 new residents a week.

Opposition planning spokesman Matthew Guy yesterday blamed the contentious Melbourne 2030 planning policy for the sharp slump in affordability.

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