(Bloomberg) --

Home prices in Sydney declined for a sixth straight month in July, driving a fall in property values across Australia as rising interest rates hit demand.

Prices in Sydney, Australia’s largest market, fell 2.2% while Melbourne dropped 1.5%, CoreLogic Inc. said in a report Monday. They were the main drivers behind a 1.4% month-on-month decline in the country’s combined capital cities index.

Housing market conditions are likely to worsen as interest rates increase during the remainder of 2022, CoreLogic Research Director Tim Lawless said in a statement accompanying the report.

“The rate of growth in housing values was slowing well before interest rates started to rise, however it’s abundantly clear markets have weakened quite sharply since the first rate rise” in May, Lawless said. “In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.”

The Reserve Bank of Australia began its tightening cycle earlier than expected in May and has since raised rates by a total 125 basis points, in back-to-back moves, to 1.35%. It’s widely expected to hike again this week with money market bets implying the cash rate at 3% by December.

RBA policy makers have so far sounded sanguine about mortgage holders’ ability to absorb rising borrowing costs, saying households are in a “fairly good position” to cope with higher rates.

Shaky Housing Adds $7 Trillion Hazard to Australia’s Economy

Monday’s report showed annual growth in capital city home values slowed to 5.4% over the 12 months to the end of July, from a recent peak of 21.3% for the year through January.

Values in Sydney are still up 1.6% from a year ago. In the relatively cheaper Melbourne market, they have crept 0.3% higher.

The house price-to-income ratio in Australia, of nearly 120, is among the highest in the developed world -- making it one of the most expensive markets globally.

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Author: Swati Pandey