Australian house prices have posted their sharpest monthly increase since August 2003, with analysts at CoreLogic saying the market is now entrenched in one of its strongest growth phases on record.

CoreLogic's monthly home value index revealed a 2.1 per cent jump in prices last month, on the back of the average Australian house price returning to record levels in the first month of 2021.

The increase was widely spread around the nation, with every capital city posting an increase and regional markets also jumping.

The average capital city increase was 2 per cent, with Sydney and Hobart's 2.5 per cent increases the strongest, while regional markets rose an average of 2.1 per cent.

CoreLogic's head of Australian research Eliza Owen said few people were selling and there were lots of buyers scrambling for property.

"This is really a function of record-low mortgage rates, a very strong economic recovery and the fact that buyer demand is very strong against relatively low levels of stock," she said.

Australia's major banks agree, with Westpac the latest to upgrade its house price forecasts for the next two years, tipping 10 per cent gains both this year and next before rising fixed-term interest rates and regulatory restrictions on high debt levels start biting from the second half of 2022.

The bank's chief economist Bill Evans and senior economist Matthew Hassan wrote last week: "The picture is unambiguously strong."

"Buyer demand has run well ahead of 'on market' supply, with sales outstripping new listings by 34 per cent over the last six months and 'stock on market' down to just 2.5 months of sales — the long-run average is 3.8," they observed.

However, Ms Owen said CoreLogic was seeing an increase in agents doing the preparatory work to list properties, which may take the edge off the type of extreme price gains seen in February.

"That suggests that there could be more stock starting to come onto the market as vendors start to respond to higher prices, potentially realising that it is a pretty good time to be selling," she added.

Growth will swing back to cities in 2022: Westpac

Regional markets continued to outperform the capitals for price increases, but Eliza Owen observed that the cities were starting to catch up.

"I think the growth prospects are still pretty strong [across regional Australia]," she said.

"What we are seeing, however, is a narrowing of the gap between that performance across the capital cities and regional Australia. As capital city markets start to accelerate again, economic conditions improve."

The Westpac economists observed that the sharp drop in inner-city high rise apartment prices in Sydney and Melbourne also appeared to have stabilised.

"The performance of sub-markets within Sydney and Melbourne also suggests that the wider drag from the drop-off in migration and apartment oversupply may be quite limited," they noted.

"The smaller capital cities and regions are well placed to continue to outperform in 2021 but growth will swing towards the three eastern capitals — Sydney, Melbourne and Brisbane in 2022 as the end of the pandemic allows international borders to reopen.

"The investor segment accounted for less than 25 per cent of new home loans over the second half of 2020 but usually averages over 35 per cent and rises in periods of housing upswings. Some tentative early evidence here is the 15 per cent increase in new lending for investors in the last two months."

Ms Owen observed that some of the rental markets hardest hit by COVID-19 were already starting to bounce back.

"Rental conditions are pretty sluggish across Sydney and Melbourne units, but they are starting to tighten up a bit," she said.

"Sydney rents increased for the second month consecutively and Melbourne has seen a month of increase in rents after nine of the past 10 months had seen a decline.

Lending surge fuels prices

The factor enabling home prices to jump far ahead of rents in most markets is readily available: cheap home loans.

Lending figures for January, released by the ABS on Monday, show a surge in lending for both the purchase of existing dwellings and the construction of new ones is enabling the property boom.

A 10.9 per cent jump in home loans for owner-occupiers led a 10.5 per cent rise in housing finance.

Despite the COVID-19 pandemic, the year to January saw Australia record its strongest annual home-lending growth on record: 44.3 per cent.

First home buyers played the dominant role, with a 71 per cent increase in loans to this group since January last year.

The 16,664 first home buyers taking out loans in January was the highest number since May 2009, with programs such as the First Home Loan Deposit Scheme enticing many into the market.

In 2009, it was the Rudd government's First Home Owners' Boost payments that saw a flood of new entrants into the property market.

However, investors are also re-entering the market, with a 9.4 per cent increase in January the strongest monthly result for this segment since September 2016, according to ANZ analysis of the data.

Although ANZ economists Adelaide Timbrell and Felicity Emmett believe this bounce may peter out as investors confront the challenge of finding tenants while borders are closed.

"Elevated rental vacancies in Sydney and Melbourne may limit the growth of investor lending in the near term, particularly as international tourism and immigration continues its long pause," they cautioned.

Will regulators turn party poopers?

With record low interest rates being the key driver of the boom in property prices, is it possible the Reserve Bank will back away from its current plan to keep interest rates around current levels for the next few years?

Westpac's economists think that is unlikely but do believe the RBA and Council of Financial Regulators, which it is a part of along with banking regulator APRA, will become increasingly uncomfortable as the boom goes on.

"Our sense is that the council will remain broadly comfortable with a 10 per cent price gain in 2021 but will start to become uneasy with a similar gain in 2022 and the associated surge in new lending," they wrote.

"We expect the council to take a measured approach to prudential tightening, much like 2015, when annual growth in new lending to investors was limited to 10 per cent, rather than the more expansive approach we saw in 2017."

Ms Owen agrees, although thinks the focus could extend beyond property investors to borrowers with very high debt levels.

"It's probably going to be something more around levels of household debt to income that we might see things tightening up, just to ensure that this debt is sustainable," she said.

"We need to make sure that people can actually keep up with that higher level of household debt."