Budget measures could cut house prices by 10 per cent

But the changes to negative gearing and capital gains tax concessions in the federal budget could cause housing prices to fall by up to 10 per cent, Morgan Stanley analysts said in a research note on Thursday.

By lowering expected returns and constraining borrowing capacity for prospective landlords, the budget fundamentally altered the mathematics for new investors in established housing, who make up a third of marginal demand, they wrote.

Even though the fall in investor demand will be partly offset by growth in owner-occupier activity, Morgan Stanley sees a five to 10 per cent drop in national prices as likely, "taking into account the soft starting point for housing with RBA rate hikes".

That would be one of the largest price corrections over the past 40 years, the analysts wrote. 

"Larger declines could come from more fundamental changes in investor price expectations or a slower than usual policy response."

Clearance rates crashed across the country over the weekend, the first since the May 12 budget, in a sign the market could already be in a downturn.

Sydney experienced the sharpest fall, from 51 per cent to 43.1 per cent, according to property data provider Cotality. 

Perth eased from 45.5 per cent to 40 per cent and Brisbane from 54.5 per cent to 49.7 per cent. Melbourne saw a slight improvement, from 52.2 per cent to 54.4 per cent.

"With auction volumes holding higher than a year ago despite low clearance rates and softening housing conditions more broadly, we may be seeing vendors become more willing to 'meet the market'," said Cotality economist Annabelle Mezieres.

That could spell good news for first home buyers, after owner-occupier lending dropped in the March quarter, pushing the investor share of loan volumes to a record 41 per cent, according to Cotality analysis of Australian Bureau of Statistics figures.

Overall home lending fell by 6.2 per cent in the quarter.

Nationally, the amount of first home buyer lending went back 4.3 per cent for the quarter.

Demand was likely to soften further, given the full impact of the RBA's three rate hikes since February had yet to be felt, said Cotality's head of research Gerard Burg.

"At the national level, the housing market is already on the cusp of a downturn, with dwelling values already contracting in Sydney and Melbourne while growth is slowing in the mid-tier capitals," he said.

Sydney and Melbourne saw values fall 0.9 per cent and 1.5 per cent, respectively, in the March quarter, Cotality data showed.

But other markets continued to rise, albeit at a slower rate. Perth led the gains with a 6.8 per cent rise, followed by Brisbane at 4.7 per cent.