House prices have fallen 4.7 per cent, the steepest quarterly drop on record, according to new data from Domain.
Prices dropped in every capital city in the September quarter, the first time in 15 years and only the second time on record.
The real estate platform's data showed the sharpest decline was in Perth, where prices dropped 7.4 per cent.
Combined capital city house prices fell to $1,226,566. Domain said markets that started the year in very different positions "are now moving in the same direction".
Houses and units dropped in price for a second consecutive month. (ABC News: Steve Keen)
Australia's biggest property markets of Sydney and Melbourne recorded their largest quarterly house price drop in four years, falling 4.7 per cent and 3.3 per cent respectively.
Unit prices also dropped by 3.5 per cent, the second consecutive quarter of both property types declining.
It marked a clear shift in the housing cycle, according to Nicola Powell, Domain's chief residential economist.
Nicola Powell says conditions have shifted to be more favourable for buyers. (Supplied)
"What began as weakness concentrated in some cities has broadened considerably," Dr Powell said.
"The balance of power has shifted towards buyers.
"Homes are taking longer to sell, there is greater scope to negotiate, and sellers are having to be more realistic about price expectations."
The cumulative impact of the rate rises, lower affordability and cost of living pressure has reduced demand, according to Gerard Burg of data firm Cotality.
"It's been a demand-led downturn,"
Mr Burg said.
Gerard Burg says the fall in prices has been driven by lower demand. (ABC News: Darryl Torpy)
Australia's most valuable homes falling the most
While all major markets across the country have joined the downturn, prices have not been dropping equally within cities.
Australia's most valuable homes are dropping the most, while lower value homes were relatively stable in three months to September, according to property data firm Cotality.
In Sydney, the most valuable quartile of homes dropped more than twice as much as the least valuable quartile.
Nationwide, lower value homes have experienced much slower drop in prices, Cotality said.
Prices grew in Darwin's lowest value quartile.
Cameron Kusher says fewer buyers and higher interest rates are pushing down the prices of more expensive properties. (ABC News: Lucas Hill)
The heavier downturn in the more expensive properties is a result of fewer buyers and higher borrowing costs, according to property economist Cameron Kusher.
"They've typically seen larger increases in values over recent years and when you see that market slowdown, there's overall fewer buyers for those properties," he said.
However, he said the ultra-top end of the market had remained largely stable.
Mr Burg agreed, saying the lower-priced homes remained affordable to a higher number of buyers.
"The median house really appears kind of out of reach of the median income household across much of the country,"
he said.
Prices were falling before federal budget
The federal budget was a factor, but not the only factor, in house price falls, according to Mr Kusher.
House prices peaked last year, and had already begun to drop before the changes to investment taxes in May's federal budget, both Mr Kusher and Mr Burg noted.
While the changes to the budget have been a factor, house prices were decreasing before the budget. (ABC News: Matt Roberts)
Mr Burg said prices were already falling in many capital cities, and the three consecutive interest rate hikes had dampened confidence in the market.
Auction activity, a common gauge of market confidence, has roughly halved compared to last year, with a total of 1,423 auctions across capital cities last week, according to Cotality.
"Confidence has really evaporated. Affordability is very stretched and borrowing capacity is reduced dramatically," Mr Kusher said.
"People just aren't in a position or able to pay the prices that a lot of these properties are worth at the moment."
He said home ownership rates had not moved much since the May budget changes, as a result of lower buyer confidence and stretched affordability.
"The first time is pretty scary as it is, and I think a lot of them are looking at it and saying, 'Well, prices are falling, why would I jump in now when there's quite a lot for sale, if I wait another six or 12 months properties will probably be cheaper,'" he said.
"I just don't think first home buyers have that urgency anymore."
He said prices would be unlikely to return to their previous heights, at least not in the short term.
"I think this downturn is probably going to drag on a bit longer than people expect, and it probably will until it looks like interest rates are going to actually be reduced again," he said.