House values dropped by almost 2% in the September quarter, but prices remain higher today than a year ago in all capital cities except Sydney and Perth.
The combination of the First Home Owner Grant boost, lower house prices and sharp falls in interest rates also has the potential to lead to a surge in home buying, according to Craig James, chief equities economist at CommSec.
"The marked improvement in the inflation situation will give the Reserve Bank greater confidence to cut interest rates in coming months," James said.
"The fall in house prices, however, is a doubled-edged sword. While cheaper prices will boost affordability, both the First Home Owner Grant and lower interest rates have the potential to dramatically boost demand for homes, lifting prices. The risk is that the 2008 share market crash and sharp falls in interest rates could spark a re-run of the home price boom witnessed 20 years ago after the 1987 share market crash."
The latest data from the Australian Bureau of Statistics shows that house prices dropped by a record 1.8% in the September quarter, pushing the annual growth rate to 2.8%, down from 8.6%.
Across the quarter, house prices fell in all of the eight capital cities except Hobart and Darwin, where they rose 0.7% and 0.1% respectively. Prices fell by between 0.1% (Adelaide) and 3.3% (Brisbane) in all other cities.
Annually, house prices rose across all capital cities except Perth and Sydney, and remained neutral in Canberra: Adelaide (9.7%), Melbourne (8.1%), Darwin (6.4%), Brisbane (5.6%), Hobart (2.4%), Canberra (0.0%), Sydney (-0.4%) and Perth (-4.1%).
The monthly inflation gauge also fell by a record 0.2% in October, with the annual rate easing from 4.5% to a nine-month low of 3.9%.
"The sharp fall in the inflation gauge will give the Reserve Bank confidence to slice the cash rate to a more normal or neutral level of 5% in coming months," James said.
"Interest rates are set to slide again and the price of petrol is poised to hit the lowest levels in around a year. Add in the fact that the share market is showing signs of recovery, and Christmas isn't looking so bad after all."
