House prices are continuing to surge, especially in Sydney, as buyers take advantage of record low interest rates.

In the year to September, the house price index rose 7.6 per cent, the Australian Bureau of Statistics said on Monday, the biggest increase in three years.

Of the eight capital cities, Sydney had the largest increase with a rise of 11.4 per cent, followed by a 8.6 per cent increase in Perth.

JP Morgan economist Tom Kennedy said the data showed the housing market, particularly in Sydney, was on the rise.

“In the nation’s largest property market, things really are starting to heat up,” he said.

“In Melbourne as well, price appreciation was very strong and also in Brisbane.”

Mr Kennedy said recent interest rate cuts by the Reserve Bank of Australia are making an impact on the housing sector.

“A big part of the Reserve Bank story is that they’ve been trying to revive the construction sector, so I think the big uptick we’ve seen in prices definitely is supportive of that, as higher prices encourage activity and investment,” he said.

HSBC chief economist Paul Bloxham said the continued rise in house prices may mean that the housing sector is picking up where the mining and resources boom left off.

“The official house price data confirmed what the more timely indicators have been suggesting – that Australia is at the beginning of a house price boom.

“While some pick-up in employment will be needed soon, to keep the RBA from cutting rates further, we expect to see some improvement in coming months supported by low interest rates, rising asset prices and lifting confidence.

“Growth appears to be rebalancing, with a modest upswing underway in the non-mining sectors and regions of the economy.”

Australian capital city house prices rose 1.9 per cent in the September quarter, and were up 2.7 per cent in the June quarter.