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Australia home prices fall in May as lending curbs start to bite

[SYDNEY] Australian house prices fell in May for the first time in 17 months, in an early sign lending restrictions are starting to damp demand.

Home values in Australia's state and territory capitals fell 1.1 per cent last month from April, according to CoreLogic Inc data released Thursday. Still, prices across the combined capitals were 8.3 per cent higher than a year ago.

The monthly decline comes after regulators tightened lending curbs amid fears of a housing bubble, and the nation's banks raised interest rates - especially for interest-only loans which are popular with property investors seeking to take advantage of tax breaks.

"The market has lost momentum, particularly in Sydney and Melbourne where affordability constraints are more evident and investors have comprised a larger proportion of housing demand," CoreLogic's head of research Tim Lawless said.

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Mr Lawless said he expects investor demand for property to slow, but not stall as potential returns from other investments such as cash and bonds remain low. Australia's record low interest rates have been a key factor in driving demand for buy-to-let properties.

Citigroup Inc chief economist Willem Buiter yesterday said Australia is experiencing a "spectacular housing bubble" which needs to be addressed with tougher regulatory measures.

"It had better be focused on immediately, to try and tether a soft housing landing," Mr Buiter said.

"Clearly if these things are not managed well they can be a trigger for a cyclical downturn."

The monthly drop was led by declines of 1.3 per cent in Sydney and 1.7 per cent in Melbourne, the two cities where prices have risen the fastest. In Sydney, prices have gained 75 per cent in the past five years, ranking it behind only Hong Kong as the world's least affordable housing market.