The Abbott government's "tough" budget appears to have hit the property sector, with house prices falling for the first time in a year.
Residential property prices in Australia's capital cities slumped 1.9 per cent in May – the biggest slide since December in 2008, according to RP Data-Rismark's home value index.
The decline coincided with a sharp fall in consumer confidence, recorded after the release of the federal budget, which included cuts to welfare, pensions, a debt tax and higher petrol and medical costs.
ANZ senior economist David Cannington said the housing market appeared to be the victim of the sharp negative reaction to the budget.
"Despite strong auction listings in the past week, home buyer demand has eased in the past month with auction clearance rates falling towards long-term averages following a period of significant outperformance."
Melbourne led the plunge with a 3.6 per cent fall, followed by Adelaide and Brisbane, which shed 1.8 and 1.7 per cent respectively.
Sydney also cooled with a 1.1 per cent decline but remains Australia's most expensive capital city, having a median home price of $678,500. This compares with $550,000 for Melbourne and $545,000 for the capitals combined.
The falls came as the Westpac-Melbourne Institute Index of Consumer Sentiment – which was the result of surveys taken after the Abbott government's budget – plunged 6.8 per cent in May to 92.9 points, its lowest since August 2011.
RP Data research director Tim Lawless said while the falls were part of a "seasonal phenomenon", with home prices easing during the cooler months, the weak consumer confidence figures were also a factor.
"There is a very strong correlation between levels of consumer confidence and housing market activity," Mr Lawless said.
"If we see sentiment levels remaining low it is likely that housing market activity will be more sedate."
Commonwealth Bank senior economist John Peters said the "million-dollar question" was whether the lull in confidence continues. "If it's not reversed it will probably flow through to softer retail trade, consumer spending and activity like housing loans," he said.
Economists said it was unlikely the Reserve Bank will pay too much attention to the house price figures.