SYDNEY (Sept 1): Australian home prices fell for a fifth month in August in the biggest downturn since the pandemic, and there is further pain ahead as stubborn inflation puts upward pressure on interest rates.

Figures from property consultant Cotality released on Tuesday showed national home prices fell 0.9% in August from July, when they dropped 1.2%. Sydney and Melbourne again led the monthly decline with falls of 1.4% and 1.1%, leaving prices down about 7% from their peaks.

Falling house prices threaten to erode household wealth and curb consumer spending just as Australia's economy faces the risk of a sharper slowdown. Data on Wednesday are expected to show annual economic growth eased to 1.8% in the second quarter, from 2.5% in the first quarter, a cooling engineered by the Reserve Bank of Australia, which has warned interest rates can still go higher.

"We are probably only about 35% of the way through the slump both in terms of the percentage fall and months," said Shane Oliver, chief economist at AMP, who is tipping a peak-to-trough home price fall of 10% in this cycle and a turnaround in the second half of next year.

"The home price slump will weigh on economic growth, but is not significant enough yet to change the direction of the RBA rate moves from up to down given the inflation problem," he said.

Separate data on Tuesday showed net exports added 0.1 percentage points to GDP growth in the second quarter, while government spending also contributed 0.1 ppt, although that was more than offset by a 0.3 ppt drag from business inventories, leaving quarterly growth stuck at a sluggish 0.3%.

A sustained slump in housing turnover would have wide implications for the economy given the housing sector's extensive links to industries ranging from real estate services to tradespeople and construction. Housing credit growth has already started to slow.

UBS analysts said it was increasingly likely house prices would drop towards 10% in this cycle, which would be among the worst downturns in Australia, leaving the central bank facing a policy dilemma given falling house prices and high inflation.

"Overall, UBS still expect the RBA to raise the cash rate by another 25bps, by Nov-26," they said in a note to clients. "The more likely timing remains in Nov-26, but the risk of an 'early hike' at the next meeting in Sep-26 is now material."

There is little relief in sight for the sector after the government's tax changes announced in May cooled investor demand. The RBA has raised the cash rate three times this year to 4.35%, and markets are fully pricing in another hike this year after a hot inflation print for July.

Nearly all capital cities recorded a fall for August, with the heat finally coming out of boom markets like Brisbane and Perth, which fell 1.0% and 0.8% respectively after double-digit gains this year.

Tim Lawless, Cotality's research director, said the softer trend in values was underpinned by weaker transaction activity, adding that sales for the past three months were down 15.5% from a year earlier.

"Longer selling times, larger vendor discounting and persistently low auction clearance rates all point to a buyer's market, yet buyers are lacking the confidence to transact at the moment."

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