Every weekend in Sydney, young Australian couples are turning up at auctions excited at the prospect of finally owning their own home, only to find that other bidders are wealthy foreign buyers with money to burn.

Last year, median house prices in Sydney rose by a crazy 15%, in some suburbs by up to 27%. Cash pouring in from China is one of the principal drivers and this flood of unregulated investment, coupled with other factors driving up Sydney house prices, are slowly changing the city’s social fabric in a way that will be felt for generations to come. Couples planning families can no longer afford to buy in the suburbs where they grew up, where they have built friendship networks or where they work. Forced further and further west and south, they are progressively cut off from their old neighbourhoods.

Watching weekly auctions, one real estate agent from northern Sydney told the Australian Financial Review that some Australians were “sick of going to auctions and being outbid by Chinese buyers paying above the odds.” Anecdotally, the Herald recently reported an auction for a Chatswood apartment at which all 16 registered bidders were ethnic Chinese. At another auction in Eastwood, all 38 registered bidders were Asian, according to the estate agent John McGrath. The property sold for $1m above the reserve price.

Of course, the real estate agents aren’t complaining; in a booming market, they share in the spoils. Savvy agents are now travelling to China to talk up Sydney properties and advertise homes in Mandarin. Prominent agent Ray White has set up an office in Beijing, from where they boast they now “catch all the best fish”.

Juwai.com, the leading broker connecting Chinese buyers with overseas property, estimates that 63m Chinese are rich enough to buy property abroad. It claims that over the last three years, the number of Chinese buyers in Australia has grown nine-fold, faster than anywhere else. For wealthy Chinese looking for a safe haven, both for their money and for themselves, it is hard to go past Australia.

The impact of those buyers on Sydney property has only just begun. As the value of the dollar falls, foreign buyers will be paying less for Sydney real estate, and the Chinese government is relaxing restrictions on Chinese citizens wanting to buy overseas assets. Real estate agents report that Chinese buyers often buy several apartments in a new development as a family group. Joseph Ngo, an agent for LJ Hooker in Glen Waverly, said that paying $100,000 to $200,000 over the market price “is not a problem for these buyers”. The same is happening in Melbourne, if not quite at Sydney’s intensity.

Under Australia law, foreigners are not permitted to buy second-hand homes, unless an exemption is granted. They may buy new dwellings but must obtain approval from the Foreign Investment Review Board (FIRB). But the FIRB simply rubber stamps applications. In 2011-12 it refused only 13 applications (down from 43 a year earlier), less than 0.01% of the total. In 2011-2012, the FIRB approved $4.2bn of Chinese spending on Australian residential and commercial real estate. It has yet to publish figures for 2012-2013, but agents say inquiries from clients of Chinese origin have doubled over the last year.

A good deal of secrecy surrounds the trend, yet observers know something worrying is happening. The Reserve Bank of Australia (RBA) is one, quietly investigating why Sydney house prices are rising much faster than bank mortgage lending. After all, its concern is understandable. Housing bubbles keep economic managers awake at night; a bust brings everyone down.

So why is the Australian government allowing this to occur? Even the government of Hong Kong, concerned that mainland Chinese investors were pushing up housing prices, slapped a 15% tax on outside buyers. It worked, immediately causing cashed-up Chinese investors to look further afield, including Australia.

While not the only factor driving up house prices – negative gearing has a lot to answer for – the impact of Chinese investment has been substantial. Treasurer Joe Hockey could stop it tomorrow if he chose to. He could, for example, instruct the FIRB to put away the rubber stamp and apply the public interest test. In granting approvals, the FIRB is required to consider the impact of each investment on the economy and the community.

It’s one thing to allow unrestricted foreign investment in businesses, and a case can be made that selling Australia’s mineral resources to China has little downside. But housing is not just another asset. It’s where people live, put down roots, raise families and join in their communities. Some experts in China believe that the rush of Chinese investment into Sydney property over the last couple of years is “just the tip of the iceberg”. A prudent government would see where we are headed and take steps now.

Editor’s note, 20 May 2015

This article was amended soon after publication on 18 February 2014 to correct the headline, a misreported statistic and some loosely paraphrased anecdotes, the combined effect of which had been to overstate the evidence then available about the impact Chinese investment was having on Sydney’s rising residential real estate prices.

The editor’s note said in part: “... the causes of fluctuations in housing prices are several and varied. Foreign buyers, and among them Chinese investors, may be a greater or lesser cause from time to time. Guardian Australia has concluded that, on the evidence presented, it was wrong to imply through the original headline that wealthy Chinese buyers are disproportionately a factor compared to any other national or ethnic group. The author stands by his opinion, as he is entitled to. Guardian Australia believes it must correct the evidence base underpinning that opinion and label it less emphatically in order to give readers assistance in weighing it and to avoid any inference of racism.”

That evidence base has since changed significantly. The recently released Foreign Investment Review Board annual report 2013-14 contains strong evidence to support the author’s original opinion. The report shows that approved Chinese investment in real estate more than doubled in 2013-14 compared to 2012-13 and was the main driver in China becoming for the first time the largest source of approved foreign investment in Australia.

The author had also urged tighter regulation of foreign investment, which a parliamentary committee has since recommended and the Abbott government has begun to implement.