Official data from the Australia Bureau of Statistics on Tuesday showed commercial finance for residential property slumped by 14.2 per cent in January, its third successive fall and the largest correction since July, 2000.
These numbers, coming on top of signs of falling business and consumer confidence and rising unemployment, appeared to drive the final nail in the coffin of expectations that the Reserve Bank will raise interest rates again anytime soon.
"This is just providing further evidence that the RBA's modest tightening to date has had a much larger impact than many people anticipated, including ourselves," said Westpac senior economist Andrew Hanlan.
"So you would have to say the Reserve Bank has overachieved in its goal of taking the heat out of the housing sector. And with these sort of falls, they can afford to sit on the sidelines for the next couple of months."
The RBA raised official interests in November and December last year, but has paused since then amid signs that tighter credit is having an impact.
Investor finance for housing has now tumbled more than 20 per cent in three months in response to higher interest rates, oversupply of apartments, falling yields and the relative attraction of other assets, such as equities.
While this will be welcomed by a central bank that had been warning of excessive investment in property, the worry is that the correction gathers its own momentum as people dump investment properties and depress the overall market.
"This is obviously a nightmarish scenario, and so it can't be dismissed lightly," Macquarie Bank analysts said in a weekly report.
"But while we recognise it as a possibility - and think that some individuals will be affected - we do not think it will be sufficiently widespread to become a macroeconomic problem."
Finance for owner-occupiers has also turned down in recent months. Data last week showed the number of new loans approved in January slumped by 8 per cent, also the biggest decline since the goods and services tax was introduced in mid-2000.
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