The number of new home loans has fallen to an almost two year low as the corporate watchdog cracks down on risky mortgage lending.

Home loan approvals fell 6.1 per cent to 50,366 in May, the Australian Bureau of Statistics said on Friday, much worse than market expectations.

It was the first fall in four months and the smallest amount of approvals since August 2013.

ANZ senior economist David Cannington said actions by the Australian Prudential Regulation Authority (APRA) may have been a key factor in the fall.

Late last year, APRA announced there would be greater scrutiny of lending practices, including visiting lenders to examine their loans books.

The crackdown came after a surge in investors entering the housing market drove a second year of double digit home price growth.

"Today's data coincides with reports of banks tightening housing investor lending conditions in May, including removing investor interest rate discounts," Mr Cannington said.

"While this will have had some impact on investor lending in the month, we think the full effect of these changes are likely to take some months to impact on investor housing finance."

Mr Cannington said housing finance demand may ease only a little, because record low interest rates and solid home price gains will continue to attract investors.

JP Morgan economist Ben Jarman said a slump in housing finance in May was expected because of reports of greater regulator intervention, but that may not tell the full story.

While there was a fall in investor housing loans, the drop was even greater for loans for owner occupiers.

The value of total housing finance fell 4.4 per cent in the month, with investor housing loans down 3.2 per cent and owner occupied housing down 5.3 per cent.

"The breadth of the pull-back is a little surprising," Mr Jarman said.

"The slump in owner-occupier flows could be the usual noise, or it could tell us that APRA has stepped up the surveillance in several dimensions and are not focused on the investor channel alone."

Mr Jarman said if the slowdown in the housing market continues it could give the Reserve Bank greater flexibility if it needs to consider another interest rate cut.

Mortgage Choice chief executive officer John Flavell said there will be other factors that will rein in demand for home loans in the coming months, including worries about the Greek financial crisis and Chinese share market volatility.

"I wouldn't be surprised to see this weaker level of demand continue, especially when you consider that the next few months of data will be from winter - which is a notoriously quiet time for the property market," he said.