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Photographer: Brendon Thorne/Bloomberg Photographer: Brendon Thorne/Bloomberg

Sydney home prices fell the most in five years in November as a regulatory crackdown forces banks to tighten lending and increase mortgage rates.

Dwelling values in Australia’s largest city dropped 1.4 percent from a month earlier, data from property researcher CoreLogic Inc. showed on Tuesday. That was the biggest drop since December 2010 and the first decline since May. Prices across the nation’s capital cities declined 1.5 percent, with Melbourne leading with a 3.5 percent decrease.

“The fact that mortgage rates have risen independently of the cash rate has, in all likelihood, become a contributor to the slowdown in housing market conditions,” Tim Lawless, head of research at the firm, said in an e-mailed statement. “Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.”

The drop in home prices is yet another indicator of the cooling Sydney property market after mortgage rates close to five-decade lows and buying by foreigners sent prices up 44 percent in the past three years. Sydney auction clearance rates, a measure of demand, have dropped for nine consecutive weeks and loans to investors climbed at the slowest pace in 14 months as banks raised interest rates to protect themselves from the risks of an overheated market.

Buyers are hesitating after the price rise hurt affordability, and a regulatory clampdown prompted banks to raise rates for owner-occupiers for the first time in five years. Economists from Macquarie Group Ltd. to Bank of America Merrill Lynch forecast a decline in prices over the next two years. Values in New South Wales state, where Sydney is the capital, are expected to climb 2.2 percent in 2016, a survey by National Australia Bank Ltd. showed Monday.

“Supervisory measures are helping to contain risks that may arise from the housing market,” the Reserve Bank of Australia said Tuesday as it left its benchmark cash rate at a record-low 2 percent. “The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months.”

Still, Sydney home prices are up 12.8 percent in the past 12 months and Australia & New Zealand Banking Group Ltd. said in a note Monday “strong underlying demand” is likely to contain any price declines in the major capital cities to less that 10 percent in the absence of an economic downturn. On Saturday, 106 of 111 yet-to-be-built apartments worth about A$160 million ($116 million) in Chatswood, 10 kilometers (6.2 miles) north of Sydney’s business district, were sold in three hours, according to Domain, an online real estate website.

The central bank, which last year called the housing market unbalanced, said in October it could be starting to slow, while rapid home construction in some areas is creating an oversupply. The number of dwellings approved for construction rose 3.9 percent in October from the previous month, according to the Australian Bureau of Statistics, beating the median forecast of a 2.5 percent fall from a survey of economists.

The banking regulator urged lenders in December last year to limit growth in investor mortgages to 10 percent a year. This year, it raised the capital the biggest lenders must hold against home loans.

Successful auctions in Sydney fell to 56.3 percent, a three-year low, separate CoreLogic data showed Monday. A third of homes in the city were sold through an auction in the 12 months to Sept. 30, according to Corelogic.

RBA Room

The decrease in prices would give the RBA room to drop rates, Lawless said. RBA Governor Glenn Stevens said last week traders should “chill out” until February when policy makers will look at data again to decide on rates.

“While the Reserve Bank is likely to welcome a slowdown in the rate of home value appreciation, the overriding objective would be to avoid a significant downturn in the housing market, which would act as a weight on economic growth and potentially impact financial system stability,” Lawless said.

— With assistance by Kimberley Verschuur

( Updates with RBA comment in sixth paragraph. )