CoreLogic's monthly home value index revealed a 2.1% 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%, with Sydney and Hobart's 2.5% increases the strongest, while regional markets rose an average of 2.1% - Philip Lowe, Governor of The Reserve Bank of Australia's - ANNUAL INFLATION RATE - target is 1.25%p/a.

Seems like Philip Lowe {Pictured above), RBA Governor, has got it wrong again.

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, an economic recovery and the fact that buyer demand is high against relatively low levels of stock," she said.

"We'd either need to see more restrained lending conditions or higher levels of supply to really start to ease the growth that we're seeing in the housing market at the moment."

Australia's major banks agree, with Westpac the latest to upgrade its house price forecasts for the next two years, tipping 10% 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% 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 upswing is also likely to see a rebalancing towards investors, particularly as affordability constraints re-emerge for owner-occupiers, including first home buyers.

"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.

"It just goes to show that the rental discount that was induced by COVID-19 isn't necessarily going to last."

When will regulators move to cool the market?

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 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 property boom goes on.

10% gain in property prices Vs 1.25% increase in wages ? Recipe for disaster ?

"Our sense is that the council will remain broadly comfortable with a 10% 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%, 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 have to remember that Interest rates will rise".

Real wage grow in Australia has been negative for approx. the last 10 years (Wage growth less than inflation), JobKeeper is ending, tourisum & education industries are destroyed, consumer debt is rising and part-time jobs dominate - but the economic geniuses at the RBA don't seem to have noticed. 

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

Cost of mortgage repayments not included in the calculation of inflation (CPI):

You may not be aware of the fact that in Australia rents are included in CPI calculations, but the cost of mortgage repayments are not, even though the cost of mortgage repayments are the single highest expense faced by the majority of Australians.

1n 2019, Commonwealth Bank senior economist Gareth Aird said there is a 'Massive flaw' in CPI as a guide to the cost of living.

'The index ignores price changes in the single biggest purchase a person (or household) is likely to make in their lifetime – a dwelling,' he wrote in a note.

Higher interest rates predicted for 2022:

Financial markets are challenging the Reserve Bank of Australia’s interest rate guidance, pricing in the first post-COVID-19 rate rise next year – about two years ahead of the RBA’s expectations.

The roll out of vaccines, high mining commodity prices and a more than $2 trillion spending stimulus planned by US President Joe Biden are fuelling more optimistic economic sentiment.

Bond investors now seriously doubt RBA governor Philip Lowe will be able to stick to his plan – articulated just three weeks ago – to hold off raising the 0.1% cash rate until 2024 'At the earliest'.

About Reserve Bank of Australia Governor Dr Philip Lowe, the guy controlling our financial policy:

Philip Lowe, Australia's highest-paid public servant received a $26,000 pay rise in 2020 even though everyone else suffered a 2.9% cut.

In 2020 Lowe was paid a total salary package of $1,085,463, up from $1,059,761 in 2019.

This $25,702 pay rise represented a 2.4% annual increase. 

Nice one Phil ! 2.4% pay rise whilst everybody else got a  2.9% pay cut - Don't think he'll be to worried about the cost of his mortgage repayments !

Bets made by professional interest rate traders in the overnight indexed swap market indicate the first hike in the cash rate to 0.25% could occur during 2022, before the RBA raises the cash rate again to 0.5% in 2023.

Commonwealth Bank of Australia interest rate strategist Philip Brown said: “The market has, seemingly, decided that the RBA will be raising rates in 2022.”

Includes data from story by | Michael Janda