Australia's housing market is expected to welcome more property investors as market conditions continue to improve, CoreLogic head of research Tim Lawless said.

After more than three years of inactivity, the investor segment started to show signs of life, with the value of investor home loans spiking by 11.6% over the three months to August. This has been the fastest rate of growth in the value of investment-loan commitments since November 2016.

What drove investors away

Investor participation fell from 43% of market activity in mid-2015 to a record low of 25.8% in July. Lawless said the decline in investor activity was due to several factors, including the macro-prudential policies that limited the speed of investment credit growth and capped interest-only lending.

"Also, investors have been paying a mortgage-rate premium over and above owner-occupier rates, which averaged 58 basis points in September," he said. "The slowdown in housing-market conditions was another factor in slowing investment activity, as prospects for capital gains evaporated."

Also read: Investors Shift Strategies

What drives them back to the market

Lawless expects the improved prospects for capital gains to 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 positive 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.

Where investors intend to investment

Data from CoreLogic show that investment activity is concentrated in New South Wales, where investors comprise 31.2% of mortgage demand. More than 25% of buyers in Victoria and Canberra are also investors.

On the other hand, Western Australia has the lowest share of investors at 15.4%. This could be due to the state's weak housing values, which have been declining since 2014.

"As investment activity rises, we could see increased price pressures as this sector of the market tends to be more competitive in setting new price benchmarks," Lawless said.

Also read: Sydney Regains Appeal With Investors

Every state and territory has seen an increase in the value of investment loans, with the largest rise over the three months ending August in Victoria and Queensland. The two states witnessed the value of investment home-loan commitments increase by 19.1%.

Lawless said investors typically constitute one-third of mortgage demand on a long-term average. However, as they 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.