Fears of a bubble in Australia's property market have increased since the Reserve Bank of Australia (RBA) cut interest rates to a fresh record low last week, but the central bank may not be solely to blame.
House prices down under appreciated 23 percent over the past two-and-a-half years and are forecast to increase by 8 percent this year, according to HSBC. Record-low mortgage rates stemming from the RBA's accommodative policy stance will likely spur the rise, it said, with more rate cuts widely expected.
But it's not just interest rates at play; HSBC believes overseas investment in residential real-estate will also drive prices this year, led by Chinese buyers in particular.
"Low interest rates are the main driver of the [housing] upswing, although foreign demand could give it a further boost," said HSBC economists in a report on Tuesday.
While China has already been the top source of foreign investment in Australian real estate in recent years, mainland demand is expected to increase as much as 20 percent in 2015, according to recent data from Chinese property website Juwai. The firm tips Australia as a top investment destination for Chinese buyers, second only to America.
"Foreign demand has been rising, reflecting a global search for yield and an on-going trend increase in foreign interest in the local housing market, particularly from China," HSBC added.
The fear is that higher prices increase the risk that the housing market will over-inflate, HSBC warned. House price growth will continue to outpace disposable household income growth, it said; the longer that happens, the greater the chance a bubble could inflate.
To be sure, not everyone is concerned.
"I think the overleverage of the Australian household story gets overplayed by offshore investors. We don't think that's going to be a huge negative factor for the economy going forward," said Jonathan Cavenagh, senior FX strategist at Westpac.
"Certainly, some pockets of the market have gone too far, but the other issue is that the household sector has actually been increasing its saving rate at the same time. So, the savings rate now is a lot higher than 5-6 years ago," which should offset any potential bubbles, he said.
A number of factors support increased mainland interest in Australia.
HSBC points to the Australian dollar, which weakened nearly 8 percent against its Chinese counterpart over the past three months, making Australian homes cheaper for mainland buyers.
"The recent fall in the AUD against the RMB could help to encourage a further ramp-up in Chinese purchases of Australian residential property," HSBC said.
Meanwhile, Juwei attributes spiking Chinese demand to Australia's new residency scheme – the Premium Investor Visa (PIV), which offers permanent residency for A$15 million.
"Once the PIV is launched in July 2015…it is highly likely that it will also further heat up the Australian property market – something that may trigger further debate amidst the rising concerns about Chinese buyers ramping up housing prices down under," Juwei said in a report.