Sydney house prices have fallen 6.5 per cent over the past year, with the market resetting to 2016 levels, new data shows.

A regulation-led slowdown saw the city’s median house price drop $76,616 in the year to September, the latest Domain House Price Report released on Thursday shows. Almost half of the drop was in the past quarter.

Experts have described what is the steepest annual house price fall in decades as a necessary downturn after years of runaway prices.

“To slow the property market down [the Australian Prudential Regulation Authority and Reserve Bank] thought the best way to do it was through credit tightening and macro-prudential measures … that’s starting to bite,” said AMP Capital chief economist Shane Oliver.

Domain senior research analyst Nicola Powell said the latest downturn was unique, because it had been driven by regulatory changes rather than interest rate hikes or economic downturn.

“Sydney buyers and sellers are now operating in a housing market with prices at late-2016 levels,” she said.

“It’s a moderation driven by policy changes, this really has never happened before. It’s a controlled downturn in the Sydney market, because house prices made such continued growth for five, six years.”

Sydney’s median house price is now at $1,101,532, down 8.1 per cent since the market peak in mid-2017.

By comparison, prices have surged 89.1 per cent over the previous six years.

“We had to slow it down. There was too much hype in it.” Mark Bouris, Yellow Brick Road chairman

And property prices have further to fall, according to Dr Oliver, who recently revised his forecast to a 20 per cent top-to-bottom fall by 2020 – credit tightening had proved more effective than he expected, and auction clearance rates were also lower than anticipated. Such a fall would put Sydney prices back to 2015 levels.

While Dr Oliver believed there was a risk tighter lending standards could have a greater than anticipated impact – coinciding with increased housing supply, the Banking Royal Commission and the potential for tax arrangement changes with a change of government — he said a crash was highly unlikely.

“Certain areas will come down quite hard in Sydney and Melbourne because they had stronger gains on the way up, “ he said. “[But] a crash would be something that occurs over a very short period of time, 12 months or 18 months, whereas what I’m looking at is ongoing cooling to 2020.”

Capital city median house prices – September quarter

Sep-18 price QoQ change YoY change Sydney $1,101,532 -3.1% -6.5% Melbourne $852,980 -3.9% -3.2% Brisbane $567,376 -0.4% 2.2% Adelaide $535,527 -0.3% 3.8% Canberra $740,215 0.0% 4.0% Perth $544,609 -2.4% -2.2% Hobart $478,491 3.7% 19.3% Darwin $519,260 -2.2% -12.0% National $781,787 -2.6% -2.9%

Apartment prices have fallen 4.4 per cent from their peak, after a 68 per cent gain — dropping 1.3 per cent to $734,775 over the last year.

“Units have proved more resilient than houses,” Dr Powell said. “With more first-home buyers coming back into the market and borrowers facing reduced lending capacity … that can skew activity to the lower end of the market.”

While there were plenty of willing buyers, vendors were unwilling to meet a new market shaped by tighter lending standards, said Yellow Brick Road chairman Mark Bouris.

“Right now we have a mismatch, vendors’ expectations are higher than purchaser expectations. What is driving purchasers’ expectations is the banks and how much they are prepared to lend,” he said.

“Buyer interest is the same. The level of inquiries we’re getting is the same as it’s always been, it’s just the amount of money we can lend is not the same as it was 12, 18 months ago.”

Capital city median unit prices – September quarter

Sep-18 QoQ YoY Sydney $734,777 -0.7% -1.3% Melbourne $496,260 -1.6% 1.5% Brisbane $376,972 -3.8% -6.8% Adelaide $316,163 1.3% -0.2% Canberra $412,888 -3.4% -4.0% Perth $347,089 -7.1% -4.5% Hobart $352,111 -4.1% 12.8% Darwin $312,456 -2.6% -11.4% National $549,163 -1.6% -1.4%

While the downturn had seen vendors’ profits take a hit, Mr Bouris said it was the market restructure Sydney needed to have.

“What was needed was not so much a price correction, but to take the euphoric nature of the market down … we had to slow it down. There was too much hype in it.”

Across metropolitan Sydney, all regions saw house prices fall except the city and eastern suburbs, where the median increased by 1.1 per cent over the year.

Sydney regions median house price – September quarter

Sep-18 price QoQ change YoY change Canterbury Bankstown $890,000 -5.3% -8.2% City and east $2,325,000 1.1% 1.1% Inner west $1,488,000 -5.2% -10.7% Lower north shore $2,292,500 -3.6% -8.3% North west $1,250,000 -1.6% -8.4% Northern beaches $1,700,000 -0.6% -7.1% South $1,171,500 -1.0% -10.3% South west $700,000 -3.8% -3.4% Upper north shore $1,650,000 0.0% -6.4% West $715,000 -1.4% -4.0%

It was the inner-west that took the biggest hit, with the median falling 10.7 per cent, followed by the south and north-west with falls of 10.6 per cent and 8.4 per cent over the year.

Buyers’ agent and OH Property Group director Oliver Stier said more established, expensive markets were less affected by tighter lending standards than newer areas and those more popular with younger buyers, where households were likely to be leveraged higher.

“People are willing to pass up on a property if it’s not checking all the boxes and they’re happy to walk if the vendors expectations don’t meet the market,” Mr Stier said.

Falling prices are bad news for some but are of course good news for others, including Gabriella and Jacob Princi-Kinchella. They recently bought a five-bedroom house in Denistone for $1.61 million, weeks after it passed in at auction.

The couple, who previously toyed with the idea of leaving Sydney so they could afford a larger family home, bought the property for $115,000 below the advertised sale price.

“When we went and inspected it there were only ever two or three other parties there,” Mrs Princi-Kinchella said. “After four weeks I think [the owner] realised they weren’t going to get what they wanted.

“We were looking on and off for two years and were not finding anything we could afford that we would want to live in,” she added. “We had never expected to find something of that size in our price bracket.”

Mr Stier said anyone looking to purchase in the cooling market should take a long-term view, and needed to be certain they were not overpaying.