SYDNEY: Sydney houses with crumbling walls, shredded ceilings, and bathrooms and kitchens stripped of fixtures are getting snapped up for millions as buyers try to grab a slice of Australia's soaring property market.

Last week, a derelict brick cottage in the city's northwest sold for A$1.6 million ($1.20 million), a price the real estate agent handling the deal said was "much more than we were expecting".

Photos on the property agent's website showed torn carpets, tattered roll-up blinds and a grime-caked kitchen.

"(The buyers) are individuals who wanted to live in this part of Sydney and are looking to knock down the property and rebuild," McGrath sales agent Michael Dowling told Reuters.

Despite the condition of the house, they were attracted by the nearly 500 sq m (5,382 sq ft) of land, he said.

"More supply is coming into the market but there is still heaps of demand."

In another desirable suburb in Sydney's southeast, an abandoned house with no water supply or power connection went this month for A$4.7 million.

Property agents said they expected to see more such sales in Australia's A$8.3 trillion housing market. Home prices nationally have surged 10.6% from a year ago driven by record low borrowing rates, tax incentives and solid employment growth.

In Sydney, median prices rose about A$1,200 a day last month, with buyers willing to pay a premium for uninhabitable homes to tear down and rebuild.

"It's more cost-effective to knock down and rebuild than renovate," said Nerida Conisbee, chief economist at real estate group Ray White.

Sydney's Northern Beaches is another desirable area where there are some "low quality homes close to the beach" that may get swooped up for their land value, Conisbee said.

"There is no shortage of people willing to buy. We are seeing very high numbers of active bidders."

The purchases are helping to drive a building boom, with approvals to build new homes at record highs.

The frothiness in the market is starting to worry Australia's Council of Financial Regulators who said last week there were signs of increased risk taking in mortgage lending by banks, although standards remain sound nationwide.

The Australian Prudential Regulation Authority (APRA) said it has written to banks seeking "assurances that they are proactively managing risks within their housing loan portfolios, and will maintain a strong focus on lending standards and lenders' risk appetites."

Conisbee said the threat of tighter prudential lending standards was a risk to the market.

"It's a headwind as we approach winter but we don't expect stricter regulations to come in a hurry," Conisbee said.

"The current demand is still largely driven by owner occupiers, not investors."