Australia's two largest markets led a nationwide drop in prices, with Sydney and Melbourne house prices falling by 1.4 per cent and 1.2 per cent respectively in July.
Values were down 0.7 per cent nationwide, the largest single-month drop since December 2022, the data released on Monday showed.
It follows Labor's controversial changes to the Capital Gains Tax discount and scaling back of negative gearing, introduced as voters flock to One Nation at the expense of the two major parties.
"People don't make investments in housing from day to day or week to week ... and so from time to time you will see movements in prices like these," Treasurer Jim Chalmers told ABC's RN on Monday.
"Housing is a long-term investment, and we continue to expect over the course of the coming years that prices will continue to rise, but more modestly than before."
Dips were also recorded in the previously booming state capitals of Brisbane and Adelaide, where prices were down 0.6 per cent and 0.2 per cent respectively, according to Cotality's latest Home Value Index.
"For buyers who remain in the market, lower competition and elevated stock levels (when compared with the start of the year) mean greater choice and more negotiating power," the property analytics firm said.
But first home buyers might benefit little from the downturn, which has been led by properties at the top end of the market.
Homes in the top quarter of the market lost 3.2 per cent of their value in the three months to July, compared to a 0.3 per gain in the lower-price tier.
For those looking beyond metropolitan areas, the regional market also dropped 0.2 per cent in the month - the first such decline since January 2023.
"There remains a mismatch between the pricing expectations of buyers and sellers," Cotality head of research Gerard Burg said.
Cooling buyer demand has been shaped by several factors, including three interest rate hikes that have limited people's borrowing power.
Consumer sentiment has also been soured by high living costs and uncertainty caused by the ongoing Iran conflict.
"We have observed a deterioration in the flow of new listings across the country in recent weeks, led by Sydney, as potential vendors assess a weak market and choose to wait until conditions improve," Mr Burg said.
In contrast, rental prices have continued to rise due to low vacancy rates.
Median rents had risen by over $200 per week in the last five years nationally, Mr Burg said.
"Despite the tight market conditions, there are question marks about how much further rents can rise," he said.
