Economists are warning of further house price falls but are confident this won't derail the economy more broadly although it may delay an official interest rate rise.
New figures show house prices across the nation's eight capital cities fell 0.7 per cent in the March quarter for a modest two per cent rise over the year.
Critically after the red-hot markets of recent years, Sydney prices dropped 1.2 per cent in the quarter to post the first annual decline in six years of 0.5 per cent.
Melbourne values eased 0.6 per cent but still showed an annual rise of 6.2 per cent.
ANZ economists have revised their house price forecasts with the weakness persisting longer than they had expected and now see peak-to-trough price declines of around 10 per cent in Sydney and Melbourne.
"This doesn't derail Australia's economic outlook," they say in a report.
"The weaker housing market reflects a regulatory induced tightening in the supply of credit rather than tighter monetary policy. We think, as a result, that the impact on the economy will be less pervasive."
HSBC chief economist for Australia and New Zealand Paul Bloxham believes given high household debt, the cooling housing market does present a downside risk to the outlook for consumption.
"However, our central case assumes only a modest negative wealth effect, given that households have been building up equity in their properties, rather than withdrawing it, in recent years," he says.
The minutes of the Reserve Bank's June 5 board meeting noted falls in Melbourne house prices had been concentrated in inner-city areas, whereas the declines in Sydney had been more widespread.
"Nonetheless, housing prices were still 40 per cent higher in Sydney and Melbourne than at the beginning of 2014," the minutes said.
Auction clearance rates in these two cities have also fallen to their lowest levels in a number of years.
Macquarie Securities economist Justin Fabo said while market corrections are always worrisome he believes the regulators would be largely delighted with the orderly cooling of housing markets so far.
"To us the real risk is on the demand side," he said.
He said if households were to lose faith in housing markets given still-elevated prices, the demand for credit could fall more than he expects.
"The main thing to fear for Australian housing is fear itself," Mr Fabo said.