Values for the combined Capital city dwelling markets declined by 0.3 per Cent (seasonally-adjusted) in the month of April, and by 0.1 per cent in raw terms.

Luxury suburbs posted the poorest performance, according to the May RP Data-Rismark Home Value Index, helping to drag the overall market down, even though in raw terms home values are mostly unchanged, slipping by 0.2 per cent.

Over the year to end April, dwellings in the most expensive capital city suburbs recorded a -5.4 per cent loss (see second chart). In contrast, home values in the middle 60 per cent of suburbs were down by only 0.9 per cent. Dwellings located in the cheapest 20 per cent of suburbs were the best performers, hardly moving (0.5 per cent).

RP Data's Tim Lawless commented, "The solid performance of cheap suburbs runs against the grain of popular claims that default rates are rocketing up amongst first time buyers, which the RBA recently rejected."

"The luxury end of the housing market is also showing its volatility. During the growth phase of the cycle the most expensive homes realised the highest capital gains. Yet as the market cools premium home values seem to be losing steam the fastest," he said.

Rismark Joint Managing Director, Christopher Joye, added, "The uber-luxury segment is risky and highly illiquid and has had the rug whipped from under it via a combination of the soaring Aussie dollar and the volatile share market. A final fly in the ointment is the much lower growth - and pay packets - expected in the financial services industry going forward. Luxury homes in areas like Sydney's Eastern Suburbs will continue to face valuation headwinds as banks deal with the new normal of subdued credit growth."

The national Median Dwelling Price in capital cities is $468,000 based on sales over the three months to April. In the ‘Rest of State' (i.e., non-capital city) markets, the national median dwelling price is a far lower $325,000. Across all Australian regions, the median dwelling price is currently $418,000.

Rismark's Christopher Joye observed, "In October before the near-double rate hike last year, we commented, "Our analysis suggests a substantial increase in rates would put some downward pressure on dwelling prices." In November last year we noted, "Our central case is that there will be little-to-no nominal dwelling price growth over 2011, with a chance of small nominal declines." This is precisely what has panned out. We have had a substantial increase in interest rates preceding a modest softening in house prices. Rismark expect at least another one to two rate hikes this year, which will solidify the cooling in residential valuations."

According to Mr Lawless, monthly movements in capital City home values have flattened out after the record-low seasonally-adjusted reading for January which was affected by a range of natural disasters.

"On a month-to-month basis, the January result was the worst on record with capital city dwelling values down -1.2 per cent (seasonally-adjusted). Since that time the magnitude of declines has moderated noticeably with average monthly seasonally-adjusted falls of -0.4 percent between February and April. Thus far this has been a very controlled exit from the strong growth conditions of 2009 and the first half of 2010," Mr Lawless said.

While the slowdown in market conditions is evident across all cities, the Sydney and Canberra markets have remained in the black on a year-on-year basis. Sydney dwelling values are up by 1.2 per cent (s.a.) while Canberra dwelling values have risen by 0.7 per cent (s.a.) over the year to April.

At the other end of the spectrum are Perth and Brisbane where home values continue to experience a more significant correction. Perth values have recorded the largest fall of any capital city over the 12 months to April, down -7.1 per cent (s.a.). Brisbane has suffered a similar fate, with home values off -6.8 per cent (s.a.).

According to Mr Lawless, the weak conditions seen in the Perth and Brisbane markets combined with the comparatively high capital gains recorded in Melbourne and Sydney has driven a widening housing cost gap.

"Brisbane's median house price is now 24 per cent lower than Sydney's and 14 per cent lower than Melbourne's. Pre-GFC the gap between Brisbane and Sydney dwelling prices was as narrow as 6.4 per cent. Perth dwelling prices are now 18 per cent lower than Sydney's and 8 per cent lower than Melbourne's. At its narrowest, the gap between Perth and Sydney prices was just 2.3 per cent. The improved buying proposition in these cities should help support buyer sentiment, which has been very weak since the financial crisis," Mr Lawless said.

Rental markets continue to slowly improve. Over the quarter gross rental yields have shown a modest improvement, moving from 4.1 percent to 4.2 percent for houses and from 4.8 percent to 4.9 percent for units.

According to RP Data's Tim Lawless, "With flat to falling home values and rental rates showing modestly consistent movement upwards, it is likely that rental yields will continue to improve. Yields are still a fair distance from the peaks seen in early 2009 when houses were returning 4.9 per cent on average and units were showing a gross yield of 5.4 per cent across the combined capital cities. Vacancy rates appear to be tight across each of the capital cities and with investor activity remaining low we aren't seeing a great deal of new rental stock being added to the market."

Mr Lawless continued, "The market outlooks remains challenging. The number of homes for sale across the capital cities is now about 31 per cent higher than at the same time last year. Transaction volumes for houses and units remain about 13 per cent below the five year average and 21 per cent below the same time last year. The result is that a smaller number of prospective buyers have a larger pool of homes to choose from."

"Properties are therefore taking longer to sell and vendors are having to adjust their price expectations downwards. Until stock levels start to be absorbed there is not likely to be upward price pressures," Mr Lawless said.

Christopher Joye added, "Notwithstanding that low vacancy rates will help rental growth outperform core inflation, the capital growth environment is as we forecast last year: missing in action. If the RBA raises rates another 1-2 times this year, we project that house prices will remain soft and likely register some modest losses. While home values in Australia have not risen for a year, wages and disposable household incomes are growing rapidly. This is improving the valuation dynamics every day. When the RBA eventually cuts interest rates, the housing market will benefit from a tremendous affordability dividend."