Former treasury economist Leith Van Onselen has warned Australia's housing market is heading for its biggest correction in 40 years, with rising interest rates, surging supply and a weakening jobs outlook creating a 'perfect storm' for property prices.

Mr Van Onselen said the conditions were now in place for a broad downturn, with housing supply rising, sales falling and unemployment expected to climb as the Reserve Bank continues its fight against inflation.

'We've just had three consecutive rate hikes, we've got rates back up where they were at last year's peak before the Reserve Bank of Australia (RBA) started cutting in February last year,' he said.

'And the markets are still tipping at least one more rate hike.

'The RBA was incredibly hawkish in their commentary on Tuesday's rate hike... they were very concerned about inflation.'

Mr Van Onselen said Australia was likely to follow the path of comparable economies such as New Zealand and Canada, where house prices have already fallen by around 20 per cent.

The Reserve Bank last Tuesday lifted the cash rate by 0.25 percentage points to 4.35 per cent - the third increase this year - citing persistent inflation partly driven by the Iran conflict, with Westpac forecasting two further rate hikes in August and September. 

The increasingly hawkish stance has intensified fears the property boom is running out of steam, with a growing number of economists and data firms warning higher borrowing costs could trigger a sharp downturn in house prices. 

Property market expert Catherine Cashmore of Land Cycle Investor has long warned of a downturn between late 2026 and 2027 and said the latest rate hike had rattled the housing market.

'I've been hearing a lot of news on the ground from people that are selling in Perth who are saying that the market is softening there,' she said.

'I heard a similar report from Brisbane from someone who's just dropped the price of their home that they're selling there, and it all feels a little bit dismal.' 

Ms Cashmore forecast Australia was not just entering a property price downturn but heading into a recession.

'We're heading into a full blown recession, where we will see property prices drop, but we'll also see businesses go out of business, panic in the stock market,' she said.

'We would be looking at a general panic and definitely heading into a recessionary environment. And I don't think that that's too much of a stretch.' 

AMP senior economist Shane Oliver said the housing market is already losing steam, with prices limping up just 0.3 per cent in April, the slowest rise in more than a year. 

'Prices fell in Sydney and Melbourne and while the boom time, mid-sized cities of Brisbane, Adelaide and Perth remained strong, they are seeing slowing growth too,' he said.

'The slowdown reflects a combination of rate hikes, buyer uncertainty associated with the Iran War and its impact, and increasing uncertainty around the tax treatment of property going into the budget, along with poor affordability.'

Oliver forecast house price growth will slump from 8.6 per cent in 2025 to just three per cent in 2026, with a real risk values could slide if interest rates stay higher for longer and the oil shock drags on. 

Domain chief economist Nicola Powell said Sydney and Melbourne remain the most sensitive to interest rate movements.

'Sydney and Melbourne are showing the clearest signs of strain, with price growth stalling or reversing as affordability pressures bite,' she said. 

'Sydney house prices stalled over the March quarter, edging down 0.04 per cent to $1.79million and ending a three-year run of uninterrupted growth.

'Melbourne house prices declined 0.6 per cent to $1.08million – the first fall in 1.5 years – ending a five-quarter run of growth.

'This also ends the longest uninterrupted upswing since 2020-21 and highlights how quickly Melbourne responds to shifts in borrowing conditions.'