Analysts have warned the "worst is yet to come" and that house prices will sink further as demand falls at a faster rate than the decrease in available properties. They suggest house prices across the capital cities could drop by up to 5 per cent a year, on top of the 2.4 per cent slide in the year to July. House prices have risen by up to 45 per cent over the past five years in Sydney and Melbourne. In the past year, record levels of population growth have not made up for investors exiting the market as banks restrict their lending under orders from the regulator and the Turnbull government. Capital Economics chief economist Paul Dales said the most worrying aspect was that "prices will soon be falling at an even faster pace". "The further decline in the number of home sales in March to a seven-year low was larger than the fall in the number of new listings," he said. He warned this was before the full effect of the banking royal commission was known.

Banks have tightened their books in response to revelations at the commission, putting the financial system on a surer footing, but risking steeper price drops. Australian Prudential Regulation Authority chair Wayne Byres said in July that the “heavy lifting on lending standards has largely been done," but Mr Dales warned "there is still a big risk that the royal commission results in a further tightening in lending standards." Mr Dales said the acceleration in the housing downturn in July should make the Reserve Bank sit up and take notice. "The danger is that house prices fall too far, too quickly and undermine economic growth in the near-term," he said.

"The RBA hasn’t said exactly what it is expecting to happen to house prices, but we’d bet that prices are falling faster and further than the bank anticipated." The CoreLogic capital city index fell by 0.6 per cent in July. Melbourne fell the fastest in July, down by 0.8 per cent followed by Perth, down 0.8 per cent and Sydney down 0.6 per cent. Prices are now 5.4 per cent below their peak in Sydney and 3 per cent below in Melbourne. The housing downturn was partly engineered by Treasurer Scott Morrison to help first home-buyers get a foot back into the market as housing affordability dominated policy discussion in Canberra last year.

Treasurer Scott Morrison. Credit:AAP Mr Morrison said in July that restrictions on investor credit were having "the desired effect of of bringing the Sydney and Melbourne house markets back to more normal transmission". He said the measures had taken pressure off the Reserve Bank to tighten monetary policy to stop runaway house prices. "I think those pressures have now been largely extinguished and those markets have moved back to more modest growth levels and not being driven so much by investor sentiment but the fundamentals of supply and demand," he said. On Wednesday, he said Labor could not be trusted to deliver confidence in house prices.

Shadow treasurer Chris Bowen. Credit:Alex Ellinghausen Shadow treasurer Chris Bowen said Labor's clampdown on negative gearing - which gives investors tax deductions on their properties - would not apply retrospectively and that it would level the playing field for home-buyers. "Now of course we have seen some of the heat come out of Sydney in particular, but I still talk to young people who are struggling to get into the housing market," he said last week. "Our policy which was designed carefully for a whole range of circumstances, of course that is what we will take to the election."