It's the vicious or virtuous circle driving housing price declines, the Reserve Bank's assistant governor Christopher Kent has said.

Key points: Tightening lending standards have caused property prices to fall

Tightening lending standards have caused property prices to fall But expectations of falling housing prices means investors are pulling back from borrowing, worsening the price drops

But expectations of falling housing prices means investors are pulling back from borrowing, worsening the price drops There is evidence that the level of (non-bank) shadow banking is rising

He says the house price downturn has entered a second order phase, as the psychological effect of lower prices bites into investor demand.

Banks have been tightening lending standards which has pushed down house prices in the major east coasts cities.

And the expectations of lower house prices makes housing less attractive to investors, which forces prices even lower still.

"It is clear that housing prices are in decline in a number of major markets" Mr Kent told a conference in Sydney today.

"This dynamic would have weighed heavily on the minds of buyers; particularly investors whose only motivation for buying is the return on the asset.

"An expectation of even a modest capital loss provides a strong incentive for them to delay buying a property, particularly in an environment of relatively low rental yields."

Credit growth has slowed down significantly since tighter lending standards were introduced in 2014. ( APRA, RBA )

The regulators, including the RBA and APRA, have been pressuring banks to tighten their lending standards over the past few years.

The regulators were worried about the level of borrowing which was feeding house price growth, so brought in curbs on the level of lending to investors and then to lower the amount of interest-only lending.

It worked, in part.

But the current housing market correction kicked into gear as banks tightened their lending standards further still, as the glare of the banking royal commission exposed lax lending.

It has made it more difficult to get a loan, or to borrow as much as previously for many.

"For example, banks have been assessing borrowers' expenditures more thoroughly, which is likely to have contributed to reductions in the maximum loan sizes offered to borrowers," Mr Kent said.

National house price falls have followed, with Sydney and Melbourne seeing the biggest declines.

Housing prices have fallen in Australia's major cities, particularly Sydney and Melbourne. ( CoreLogic, RBA )

But now Mr Kent says in response to house prices going backwards, demand for credit has also dropped.

"The links between these two markets run in both directions, from housing credit to the housing market, and from the housing market to housing credit," he said.

This feeds on itself.

Lower credit supply means lower house prices.

Lower house prices means lower credit demand, which in turn means even lower house prices.

Meanwhile, while banks have lowered their exposure to investors, there has been a noticeable rise in non-bank (or shadow bank) lending to investors.

Mr Kent says "the members of the Council of Financial Regulators (which includes the Reserve Bank, APRA and ASIC) are monitoring the growth of the non-bank lenders for possible emerging financial stability risks".