New research shows property sales across the country have slumped to their lowest level in 10 years.
The fresh figures from RP Data show sales of houses and units dipped 20 per cent in 2010 on the back of a number of interest rate rises.
Darwin recorded the biggest fall in sales, followed by Brisbane and Hobart, while Sydney was the best performer with Adelaide not far behind.
Research analyst Cameron Kusher says sales last year fell below those recorded at the height of the global financial crisis in 2008.
"The market's been cooling since about May of last year," he said.
"We've also seen a 100-basis-points worth of official interest rate hikes during 2010, which clearly put a dampener on the market in the second half of the year.
"We saw a lot of properties advertised for sale on the back of a period where we'd seen quite strong growth in property sales for 17 or 18 months."
Mr Kusher says housing affordability is stretched and people are not in a position to pay the current prices.
"We are expecting with so few first homebuyers active in the market, and obviously affordability an issue as well, that we'll start to see some increases in rental rates," he said.
"So you may see a return of investors at some point this year, but it'll be a different type of investor. It'll be those chasing rental return rather than those capital gains."
Home loans drop
Meanwhile, the number of owner-occupier home loans taken out has fallen more sharply than expected in January.
Figures from the Australian Bureau of Statistics show home loans fell 4.5 per cent from December to January.
On average economists were expecting home loans to fall just 1 per cent in the month.
The value of loans for investment housing slumped 6.8 per cent in January.
Housing Industry Association chief economist Harley Dale says loans to build new homes have slumped more than 9 per cent to their lowest level in more than two years.
"Unfortunately most of the improvement has been wound back in one hit," he said.
"We did see encouraging signs in the December quarter last year with a bit of a lift in new home lending, but that's all but been wiped out with the January result."
Mr Dale says the undersupply of homes in Australia is set to worsen.
"The signal we're getting from a weak housing finance figure released today is that we're going to see further short-term pressure on rents and on housing affordability as a result of Australia continuing to build considerably fewer homes than we need to," he said.
