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SYDNEY, Feb 5 AAP

February 05 2013, 12:30AM

A large fall in imports and rising commodity prices helped reduce Australia's trade deficit in December.

The trade deficit narrowed to $427 million in December, seasonally adjusted, compared with an upwardly-revised deficit of $2.788 billion in November, figures released by the Australian Bureau of Statistics (ABS) show.

The figures, released on Tuesday, showed exports rose 3.0 per cent, while imports fell 6.0 per cent.

ANZ head of Australian economics Justin Fabo said the trade figures were better than expected.

"Overall, it's a pretty good number, a pretty sharp improvement in the trade balance," he said.

He said the fall in total imports was likely due to a sharp drop in imports of capital goods, which were notoriously volatile, during the month.

A rise in commodity prices and exports of coal and iron ore would have contributed to the rise in total exports, he said.

"We know that volumes of coal and iron ore rose strongly in the month, we also know that the iron ore price was up strongly," he said.

Meanwhile, other figures released by the ABS on Tuesday showed Australian capital city house prices rose 1.6 per cent in the December quarter.

UBS economist George Tharenou said the rise in house prices was much stronger than expected, but supported the broad trend that property values were picking up.

"I think the RBA's (Reserve Bank of Australia) interest rate cuts have made a material difference to housing affordability, which has improved to be the best in around a decade," he said.

"That has stimulated people to go out and pay more for homes."

Mr Tharenou said the data, coupled with a rebound in equity markets, was evidence that household wealth was improving and pointed to further house price increases in coming months.

"At the same time, I'm not expecting the double-digit plus rebounds in house prices we saw coming out of the GFC (global financial crisis)," he said.

"I think there's still a more subdued expectation of prospective house price gains."

Mr Tharenou said that while the trade deficit had improved markedly in December, it followed a "substantial deterioration" in earlier months.

He said the key driver was the sharp fall in imports.

"The broader trend is that imports have fallen back after a strong uptrend over the past couple of years," Mr Tharenou said.

More positive, he added, was the fact that exports were continuing to recover with a third consecutive increase.

"This was particularly driven by higher commodity prices, with iron ore rebounding over the last few months or so," he said.

St George chief economist Hans Kunnen said the solid rise in house prices was a sign consumers were getting a bit more confident about the economy and increasing demand for homes.

"It's been one of the bug bears of the Australian economy for the past few years," he said.

"So, there's a rise in consumer sentiment. I don't think it has a lot of implications for interest rates other than to suggest to the RBA that, despite evidence to the contrary, (cuts) in interest rates still do work.

"It's a sign that lower interest rates are having some bite somewhere."

Mr Kunnen said the fall in the trade deficit and the rise in exports were encouraging.

"Just looking at the raw figures, iron ore up, coal up, natural gas up, and that's just from November," he said.

"Over the quarter, there were solid increases in volumes and prices. That's what we need to keep economic growth going.

"I think it will be a positive for the fourth quarter economic growth and continue on into the new year.