A record-breaking plunge in house prices and tumbling building approvals have sparked calls for the Reserve Bank of Australia to hold off on further interest rate hikes.
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The calls come amid concerns about the impact of tighter monetary policy on the economy.
Home values have plummeted 8.4 per cent nationally since last May, an index compiled by property data firm CoreLogic shows.
It is the deepest and sharpest decline measured by the index, eclipsing an 8.38 per cent drop that occurred in the two years to mid-2019 when lending standards were tightened.
Sydney, which headlined the national run-up in house prices during the pandemic, has also led the downturn. House values in the nation's largest city have so far fallen 13 per cent since May 2022, followed by Brisbane (10 per cent) and Melbourne (8.6 per cent). Canberra has experienced a more modest decline of 7.6 per cent since June last year and is still well short of the 14.5 per cent fall that occurred in 1994 to 1996, when official interest rates reached 7.5 per cent.
CoreLogic head of Australian research Eliza Owen said the rapid drop in house values reflected the "extreme" shift in interest rates, which have been pushed up 300 percentage points to 3.1 per cent in the past eight months.
Ms Owen said the sharp increase in borrowing costs, combined with rising inflation, high household debt and the hangover from a house-buying spree during 2021, had deterred potential buyers and would continue to weigh on the market while price pressures remained elevated.
The Reserve Bank raised its cash rate to 3.1 per cent last month and has flagged it expects to take it higher. Markets expect the rate to be increased to 3.35 per cent when the RBA board meets on February 7, and reach 3.9 per cent in September
But Housing Industry Association economist Tom Devitt said that would be a mistake.
Mr Devitt warned any further increase in interest rates could strangle demand for new homes and leave the industry without the resources to meet future housing needs.
The number of dwellings approved for construction tumbled 9 per cent lower in November, according to the Australian Bureau of Statistics, to be down more than 15 per cent from a year earlier.
Though much of the decline was driven by an almost 23 per cent fall in the volatile apartments and units segment of the market, Mr Devitt said figures reflected the drop in demand observed by home builders since interest rates began rising.
Some easing in housing activity is unlikely to ruffle the Reserve Bank as it tries to damp down price pressures in the economy.
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A heavy backlog of work and tight supply and labour constraints are helping hold construction costs up but Mr Devitt cautioned they could also be muffling signals about the true impact of higher interest rates on the housing industry and broader economy.
"Normally there is about six months from an interest rate rise to less home building work occurring on the ground," he said.
"Because of the volume of work and the supply and labour constraints, that lag is now eight to 18 months, so the Reserve Bank is not going to see the impact of interest rates until 2024 and 2025. There is a big risk if they put them up further. They need to hold off for now."
If they do not, he warned, higher rates could squash demand, forcing builders out of the market and leaving the country without the skills and labour it needs to build homes for an expanding population. In turn, this would deepen the housing affordability crisis.
CommSec chief economist Craig James thinks the Reserve Bank will raise rates to 3.35 per cent next month but will then pause as it assesses the effect tighter monetary policy is having on the economy.
