While home loan providers have witnessed a rebound in investment loans, investors’ share of overall loan commitments continued to contract, according to the latest figures from the Australian Bureau of Statistics.

The value of investor home loans rose 1.4% in October, rebounding from a 3.9% decline in September. Despite this uptick, the proportion of investor loans in overall home financing has dropped to 28%, down from the long-run average of 38%.

"Having declined for 11 straight months since mid-2018, investor lending has turned around registering increase during four of the past five months," said Shane Garret, chief economist at Master Builders Australia.

Also read: Investors Slowly Return To The Market

One explanation behind the falling share of investors is the faster-than-expected growth amongst owner-occupiers who are taking advantage of affordable dwelling prices and the low interest-rate environment.

Owner-occupier financing grew by 2.2% on a monthly basis and 5.7% from a year before. This indicates that owner-occupiers are driving the house-price recovery.

In fact, the average owner-occupier loan size increased by 1% over the month, with the average loan value for the purchase of existing homes rising by over 2%.

"This rebound is being driven by looser monetary conditions, which have enabled the rapid recovery in Sydney and Melbourne house prices," said Maree Kilroy, an economist at BIX Oxford Economics.

However, she said this momentum in established housing markets could result in a double-digit increase in median prices.

CoreLogic head of research Tim Lawless said the improved prospects for capital gains could attract more investors to the housing market.

"Additionally, credit policies have loosened, and lenders are becoming more competitive for investment borrowers," he said.

Interestingly, the gap between mortgage rates and rental yields could result in properties to be in a favourable cash-flow scenario from the outset of the purchase. In fact, the average interest rate for a three-year fixed investor mortgage is 3.8%, just a little higher than the combined capital city rental yield at 3.7%.

"The spread between fixed-rate mortgages and gross rental yields hasn't been this narrow since at least 2005," Lawless said.

With this, he said investor participation could increase in the coming year. However, as investors start to boost their presence in the market, first-home buyers are likely to retreat.

"The trend in these two segments of the market is typically counter to each other; more investors, less first-home buyers and vice versa," Lawless said.

First-home buyers recorded an increase in loan commitments in October. On a monthly basis, first-home buyer loans grew by 1%. The gain becomes more significant on an annual basis, rising by 18.5%.

"First-home buyer activity remains strong despite the increase in house prices. They now account for nearly 30% of all buyers," said Tim Reardon, Housing Industry Association chief economist.

Interest rate cuts, tax relief, and easing of lending rules would likely continue to have a positive impact on the market, he said.

"If these conditions remain, the market will stabilise during 2020, at levels well below those experienced in recent years," Reardon said.