By Stella Qiu

Australian home prices suffered their steepest fall in three-and-a-half years in June as a record housing boom succumbed to higher borrowing costs, while a tax clampdown on investment properties rattled buyers.

Figures from Cotality showed national prices fell 0.4% in June from May, the biggest monthly drop since December 2022, though they were still up 7.3% this year. Downward revisions to past months also now suggest prices peaked in March and were down 0.7% in the second quarter.

Sydney and Melbourne led the monthly decline with a 1.2% drop and a 1% fall, respectively. The mid-sized capital cities also recorded a sharp slowdown in their growth, with Adelaide flatlining, Brisbane up 0.3% and Perth 0.7% higher.

The slowdown came after a jump of more than 30% in national property prices over the past five years, which has defied COVID-19 lockdowns and a surge in borrowing costs thanks to persistently tight supply and robust population growth.

"Even before interest rates rose by seventy-five basis points, we were seeing affordability hurdles weighing on buyer demand," said Cotality's research director Tim Lawless.

"Higher cost-of-living pressures, deeply pessimistic sentiment and a further dampening of demand via property taxation changes announced in the federal budget are all contributing to weaker housing conditions."

Data from Equifax showed mortgage demand dropped 6.6% in the five months to May from a year earlier, compared with a 0.9% decline for the January-April period. Enquiry levels from first home buyers tumbled a whopping 9.1%.

Auction clearance rates in capital cities fell to 47.4% last week, the lowest reading since April 2020, when the COVID pandemic lockdowns paralysed the economy. Capital city home sales in the June quarter were 16.2% lower than in the same period last year.

RBA WATCHING HOUSING SLOWDOWN

The Reserve Bank of Australia noted on Tuesday that the housing market had eased and housing credit growth looked set to slow, part of the expected impact as its three rate hikes from February flowed through the economy. However, it did note the risks of a potentially material weakening in the housing market, which could inhibit consumption.

A growing number of economists now expect prices could drop this year, with falls more pronounced in Sydney and Melbourne, although still tight supply and an expected pull-back in investor sales due to the fact the proposed tax changes would not be applied retroactively are expected to limit downsides.

Official data showed on Wednesday that approvals for dwelling units fell 1.1% in May after a 0.2% drop the previous month, pointing to continued pressure on housing supply.

Markets are also wagering that interest rates in Australia have likely peaked, with just 12 basis points of tightening expected by the end of the year. Rate cuts are also back on the menu, with one rate cut fully priced by the end of 2027. (0#AUDIRPR)

AMP expected a peak to trough of 6% in prices until around the middle of next year when rate cuts come in, similar to the scale of past downturns during the global financial crisis or in the 1990s.

"A lot of the things that drove the big supercycle upswing of property is sort of starting to fade, and therefore we could see prices bottom the middle of next year but then the (next) upswing might be milder than we've become used to," said Shane Oliver, chief economist at AMP.

"Now we seem to be embarking on more of an upswing in rates longer-term... there is political pressure to slow immigration and the tax changes are fairly big, resulting in less investment activity generally in the property markets than previously."