Just how far house prices could fall: Expert reveals what could spark nationwide real estate 'flu'

A real estate expert has warned that Australia's property boom is unravelling at speed and could fall by another 10 per cent as house prices plunge and auction rates stall.

Tom Panos issued the grave warning as fresh data from Domain's House Price Report showed on Thursday that Sydney was leading the downturn.

The NSW capital saw house prices plunge 3.3 per cent to $1.73million in just three months, while Melbourne recorded its steepest quarterly decline in nearly four years, falling 3.1 per cent to $1.04million.

Mr Panos said Sydney and Melbourne were already on a downward trajectory before the federal budget on May 12, but said the Albanese government's changes to capital gains tax and negative gearing 'turbocharged' the decline.

'It was like the tap turned off instantly,' he told Daily Mail.

'I think Albanese and the government misread the play. I think Sydney and Melbourne, certain marketplaces, have already dropped 10 to 15 per cent.

'Sydney and Melbourne matter because if they sneeze, the rest of the country gets the flu.' 

When asked whether house prices could fall another five to 10 per cent, Mr Panos said there was 'potential' for further declines.

'I think it's possible,' he said, although he dismissed suggestions values could plunge another 20 per cent from current levels as 'unlikely'.

Across the combined capitals, house prices fell 1.4 per cent over the June quarter, wiping almost $17,500 from the median value as high interest rates, affordability pressures and buyer uncertainty continued to cool the market.

Canberra also posted a 2.5 per cent decline, while Brisbane and Perth managed modest gains despite signs of slowing momentum.

Adelaide was the standout performer, with prices rising 4.8 per cent over the quarter, making it the only capital city where annual house price growth accelerated. Perth meanwhile continued to record the nation's strongest annual growth, up 22.5 per cent.

Domain's chief of research and economics Dr Nicola Powell said the June quarter marked a clear turning point for the housing market.

'Three months of data confirm that higher interest rates, affordability pressures and weaker confidence are changing buyer behaviour and bringing the broad-based growth cycle to an end,' she said.

Dr Powell said affordability had become the dominant force shaping the market, shifting the balance of power away from sellers.

'Buyers have more choice, less urgency and greater negotiating power than they've had in several years,' she said.

The unit market was also weakening, with price falls across most capitals suggesting first-home buyers and investors were becoming increasingly cautious as borrowing costs rise and expectations for future capital growth fade. 

Former Treasury economist Leith van Onselen warned last week Australia's housing market could be headed for its biggest correction in 40 years, exceeding the 8.2 per cent fall recorded during the sharpest downturn in Cotality's data. 

He argued the nation was at risk of following the path of comparable economies including New Zealand and Canada, where house prices fell by around 20 per cent after governments wound back investor tax concessions.

But Dr Powell described such forecasts as 'slightly alarmist'.

'When you're talking about a 20 per cent decline in home values on a national level or even a capital city level, that is a housing market crash,' she said.

'History proves it's never done that.

'If prices decline so far, people don't sell and they hold back. 

She said hesitant buyers were also helping drag out the downturn.

'Buyers don't want to be the first one through the door in a falling market.' 

Mr Panos said the market was now locked in a 'Mexican standoff' between cautious buyers and reluctant sellers.

'Buyers know they're buying good value compared to six months ago, but they're concerned that it's going to keep dropping,' he said.

'They don't want to buy on a Friday to find out that the home they've purchased is cheaper on the Monday.'

New Roy Morgan data released on Wednesday showed more than 30 per cent of mortgage holders were classified as 'at risk' in June, equivalent to 1.6 million Australians and 68,000 more than the month before.

The rise marked the fifth consecutive monthly increase in mortgage stress, with Roy Morgan warning conditions could deteriorate further if the Reserve Bank delivers more rate rises in the coming months.

Mr Panos warned another one or two rate hikes would put further pressure on borrowers and deepen the housing downturn.

'I think it's going to get worse before it gets better,' he said.

'My concern is when people start struggling to pay their loan repayments, they start putting properties on the market.'

But he said any downturn would eventually hit a natural floor as many owners refuse to sell at sharply lower prices.

'There comes a point of time where vendors simply say, "I won't sell. I won't sell at that price".'