House sales in some of Melbourne’s most highly prized suburbs are falling through amid widespread confusion about the federal government’s foreign investment laws.

Tougher bank lending criteria and uncertainty around a Foreign Investment Review Board “clarification” are hitting overseas property buyers hard, forcing a slowdown at the top end.

Chinese nationals have been the biggest foreign buyers of Australian property during the past two financial years, spending $24.3 billion in 2014-15.

The slowdown has been concentrated in areas favoured by Asian buyers, particularly Balwyn, Glen Waverley and Mount Waverley.

Agents say that after a change to FIRB rules late last year, overseas-based buyers could no longer buy a new free-standing home. The board says a single house built to replace one or more demolished houses would not generally be considered a new house.

But these buyers can still buy new townhouses and apartments, subject to FIRB approval.

The ANZ recently tightened lending rules for foreign buyers, including not accepting loan applications based solely on foreign income. Other lenders, including the Bank of Melbourne, have introduced new systems for identifying foreign income.

Offshore buyers also have to pay a $5000 application fee for a home valued under $1 million, and $10,000 for a property over $1 million.The fee rises proportionately with the purchase price.

Glen Waverley agent Andrew Dimashki of Harcourts Judd White said many new luxury homes built specifically for the overseas market were struggling to find a buyer following policy changes.

“It’s really affected our higher-end sales, between $2 million and $4 million homes, and we’re finding they’re now just sitting on the market,” he said.

“Our developers and sellers who are looking to move these properties are really having to break even or selling below costs because they need to find local buyers, who aren’t prepared to pay these huge prices.”

Agents are also feeling the effects of diminished borrowing power.

A three-bedroom house at 77 Windella Crescent in Glen Waverley had two contracts of sale fall through because of finance in the past 30 days, Mr Dimashki said. He believed the new policies had slowed activity from that market by about 50 per cent.

Hocking Stuart Balwyn agent Helen Yan said many Asian buyers who flew to Australia over the lunar new year were disappointed to find they couldn’t buy a new free-standing home.

It was also harder to sell the luxury homes following the rule change, and properties were not reaching their price potential.

A new five-bedroom house in the prized Balwyn High School zone sold for $4.9 million to a local family after receiving interest of about $5.1 million from an overseas buyer, she said.

Marshall White’s Robert Ding said there was “a lot of confusion” regarding what overseas buyers could and could not buy.

Mr Ding believed offshore buyers with some temporary visas could still buy new homes subject to FIRB approval, but those with student visas and without a temporary visa could not. He claimed tougher bank restrictions had slowed activity by more than 10 per cent.

RT Edgar director Mark Wridgway said most banks had enforced tighter lending rules for foreign buyers, which had led to a dramatic slowdown in Balwyn and surrounding suburbs.

Asked to explain the recent FIRB update, a spokesman for treasurer Scott Morrison said the board’s “new guidance note was a clarification of existing rules”.