Melbourne’s median house price has dropped 3.9 per cent in three months and is falling faster than in any other capital city, new data shows.

The latest slide puts the city’s house prices at the same levels as those recorded in early 2017, according to the latest quarterly Domain House Price Report released on Thursday, and is the first annual decline in six years.

Prices have headed south since December, when the median hit its peak of $909,746, on the heels of five years of rampant growth. After a $35,000 quarterly drop the median is now sitting at $852,980.

“The falls follow one of the longest runs of consecutive growth in recent history when house prices rose 72.9 per cent in just over five years,” Domain senior research analyst Nicola Powell said. “Having this pullback is the natural dynamics of the property cycle.”

ANZ senior economist Daniel Gradwell said Melbourne’s weak quarterly results were in line with expectations and further falls were predicted.

“We’re still thinking of price falls across Sydney and Melbourne of 10 per cent from peak to trough,” Mr Gradwell said, citing flat credit growth and falling auction clearance rates.

“We’ve got ongoing credit tightening that is going to continue to keep impacting potential buyers over at least the next couple of months, but potentially longer. And I think that sentiment issue is coming into play as well, where people feel like there’s no rush to get into the market like there was 12 or 18 months ago.”

The Domain report showed units outperformed houses over the quarter, recording a more mild drop of 1.6 per cent to a median of $496,260. This was likely driven by the affordability constraints of budget-conscious buyers and an influx of first home buyers, Dr Powell said.

Capital city median unit prices – September quarter

Sep-18 QoQ YoY Sydney $734,777 -0.7% -1.3% Melbourne $496,260 -1.6% 1.5% Brisbane $376,972 -3.8% -6.8% Adelaide $316,163 1.3% -0.2% Canberra $412,888 -3.4% -4.0% Perth $347,089 -7.1% -4.5% Hobart $352,111 -4.1% 12.8% Darwin $312,456 -2.6% -11.4% National $549,163 -1.6% -1.4%

Amid weaker market conditions, AMP chief economist Shane Oliver last week revised his property price forecast, tipping prices to slide by 20 per cent in Melbourne and Sydney. Previously AMP had forecast top-to-bottom falls of 15 per cent spread out to 2020.

In a note to investors, Mr Oliver observed the “FOMO [fear of missing out] phenomenon of up until a year ago risks turning into FONGO [fear of not getting out], particularly for investors …”

“The market has taken a turn in a good way … the buying frenzy has calmed down. We noticed that the good properties were selling at a reasonable price.” Wilson Tang, homebuyer

Domain data shows houses in the inner city — which includes the suburbs of Fitzroy, Richmond, South Yarra, Toorak, St Kilda and Middle Park — and the inner east had taken the biggest price drops over the quarter, down 7.9 per cent and 6.1 per cent respectively.

Melbourne region median house prices – September quarter

Sep-18 median price QoQ change YoY change Inner city $1,105,000 -7.9% -15.0% Inner east $1,350,000 -6.1% -12.9% Inner south $1,235,000 -5.0% -8.5% North east $705,000 -2.1% 1.4% North west $615,000 -1.6% 5.5% Outer east $755,000 -4.4% -5.6% South east $640,000 -1.5% 3.2% West $599,750 0.8% 6.2%

Since September last year, roughly $200,000 has been shaved off the median house price in both regions. The median in the inner east is now $1.35 million, while the inner city sits at $1,105,000.

Housing finance data suggests owner occupiers, particularly first home buyers, are filling in the gaps left by retreating investors.

Capital city median house prices – September quarter

Sep-18 price QoQ change YoY change Sydney $1,101,532 -3.1% -6.5% Melbourne $852,980 -3.9% -3.2% Brisbane $567,376 -0.4% 2.2% Adelaide $535,527 -0.3% 3.8% Canberra $740,215 0.0% 4.0% Perth $544,609 -2.4% -2.2% Hobart $478,491 3.7% 19.3% Darwin $519,260 -2.2% -12.0% National $781,787 -2.6% -2.9%

For recent home buyers Wilson Tang and wife Elodie Lim, the negative chatter around property prices was not a concern.

“We were looking when the time was right for us,” Mr Tang said. “We want to start a family and we needed a bit more space.”

He said his new home’s location, size and layout was more important “than its resale value in one year’s time”.

The couple, both architects who started their own firm three years ago, recently bought a two-bedroom brick home in Coburg North after it passed in on a vendor bid at auction. They plan to renovate and extend the home in the near future.

“The market has taken a turn in a good way,” Mr Tang said. “I think the buying frenzy has calmed down. We noticed that the good properties were selling at a reasonable price.”

The only quarterly rise in house prices was in the west, but growth was minimal at 0.8 per cent.

Dr Powell said houses at the middle to upper price points were feeling the brunt of the downturn, while an influx of first home buyers was propping up the bottom end.

“Even though prices are softening, it’s not across the board,” Dr Powell said. “We’re still seeing price growth for houses at the lower end of the market.”

Despite October being one of the city’s busiest selling months of the year, auction clearance rates have sunk below 50 per cent. Last week, just 48 per cent of homes listed to go to auction sold under the hammer.