As interest rates rise and buyers become strained by high fuel prices, Sydney and Melbourne have recorded their first quarterly house price drop in years, with further falls likely to come.

New data showed that both Sydney and Melbourne have recorded their first quarterly house price declines in years, as buyer sentiment continued to fall amid rising interest rates and global issues.

According to Domain’s March Quarter House Price Report, Sydney’s house prices fell 0.04 per cent, by $772, over the March quarter to $1.79 million, ending a three-year run of uninterrupted growth.

Similarly, Melbourne marked its first quarterly decline in 18 months, with house prices falling 0.6 per cent, by $6,357, to $1.083 million.

Despite the quarterly fall, the annual outlook remained positive, with house prices growing by 6.6 per cent in Sydney and 4.4 per cent in Melbourne.

According to Domain, the data showed a turning point in the country’s two most expensive cities, with tightened affordability, limited borrowing capacity and growing buyer caution.

“These interest rate-sensitive markets are responding quickly as buyers reassess budgets, risk and how far they are willing to stretch,” it said.

Domain’s chief economist, Nicola Powell, said there had been a softening across both housing markets, indicating that cities were most sensitive to changes in interest rates and the broader economy.

“Obviously inflation was already reaccelerating even before we saw the war in the Middle East break out, but I do feel the spike in fuel prices has had a major impact on confidence,” she told Real Estate Business.

She said cautious buyers were becoming more prominent in Sydney and Melbourne, with activity resulting in lower clearance rates, longer days on market, and rising supply.

“Buyers are becoming much more conscious of how much they pay for a home and where they buy when they buy and overall choices rising, which is helping to take away any element of urgency.

“Looking back at history, often those decisions to buy and sell a home don’t change, but when you go through periods of uncertainty, people pause their decisions and they delay their decisions,” she said.

In contrast to the house price results, Sydney and Melbourne’s unit markets have proven more resilient, as buyers shift towards more affordable options.

Across the March quarter, Sydney unit prices rose 0.6 per cent to a record $848,227, achieving growth of 13 consecutive quarters, while annual growth rose to 3.5 per cent, the fastest pace in 1.5 years.

Melbourne unit prices fell 0.4 per cent over the quarter, the first decline in nine months, while annual growth increased to 5.5 per cent, the strongest in more than four years.

Powell projected Melbourne and Sydney’s overall dip in growth to continue, with indicators, such as this week’s high inflation result, hinting at another cash rate rise, with more to possibly come.

“I think that reduced borrowing capacity and higher mortgage serviceability is going to slow down activity and therefore come out in further price falls in Sydney and Melbourne,” Powell concluded.

This article was first published on Real Estate Business, a sister-brand of Property Buzz.