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THE housing bubble is deflating, the Reserve Bank has declared, suggesting interest rates are on hold for the foreseeable future.
The bank published figures showing house prices fell across Australia in the first three months of this year.
This was the first across-the-board fall since the recession more than 10 years ago, according to some analysts.
"A turning point appears to have been reached in the housing market after the overheated levels of late last year," the bank said in its quarterly report card on the economy.
'There are recent indications that house prices may have reached their peak."
It also suggested that the huge growth in home lending was also beginning to decline.
After warning for more than two years that unsustainable growth in house prices and runaway household debt posed a threat to the economy, the Reserve Bank now seems confident the housing market is in retreat.
Macquarie Bank economist Rory Robertson called the figures showing the falls in house prices one of the "most sensational tables the Reserve Bank has ever published."
Mr Robertson said that if house prices kept failing, and this damaged consumer sentiment and crimped spending, interest rates might even be cut.
"The big house price upswing has ended and we have the first quarter of negative price growth in over a decade," he said. "What happens next is anyone's guess."
The Reserve Bank published Australian Property Monitors figures showing prices for established homes not just apartments - fell 8.4 per cent in the march quarter. Prices in Melbourne were down 14. per cent, followed by Sydney at 10.5 per cent. The Bank noted the housing market's decline was against an "advantageous" economic backdrop, with unemployment and inflation low and the world economy gaining momentum.
Economists say the statement suggests rates will not change for some time. JP Morgan senior economist Andrew Pease said: "The Reserve Bank thinks that, housing is cooling, economic growth is sustainable, and inflation is under control. The cash rate will be unchanged at 5.25 per cent for the foreseeable future."
The Bank forecast inflation would fall to 1.75 per cent by the end of this before rising to 2.5 per cent by the end of 2005.