SYDNEY (BLOOMBERG) - Australian home prices posted their first fall in 20 months, led by declines in Sydney and Melbourne, as a combination of higher interest rates and a rising supply of properties dampened demand.

Sydney dropped 1 per cent in May, its fourth straight monthly fall, while Melbourne slid 0.7 per cent, CoreLogic said in a report on Wednesday (June 1). That pushed the combined capital cities index 0.3 per cent lower over the month.

"Sydney and Melbourne are usually the bellwether of what is happening in capital city markets," said Ms Eliza Owen, head of Australian research at CoreLogic.

"Generally when we see an increase in the cash rate, that has an impact on prices. There are also other factors at play - more supply is hitting the market that is giving buyers a little bit of buying power."

Australia, like much of the developed world, recorded significant property gains through the Covid-19 pandemic after the Reserve Bank slashed rates to near zero to help prop up the economy.

But rising expectations of further policy tightening after last month's rate rise, together with already high house prices, is beginning to cool buyer ardour.

The Reserve Bank of Australia meets on Tuesday and is widely expected to execute back to back monthly 25-basis-point increases to take the cash rate to 0.60 per cent. Money markets are pricing in a cash rate of 2.7 per cent by December.

Today's report showed annual growth in home values in capital cities slowed to 11.7 per cent over the 12 months through May, from a recent peak of 21.3 per cent for the year through January.