SYDNEY--Despite sharp falls in house prices across Australia over recent months, housing affordability still slumped to its lowest level on record in the second quarter.

The Housing Industry Association's affordability index deteriorated by 3.1% in the second quarter, putting Australian housing at its least affordable since HIA records began in 1994.

Rising interest rates have more than offset price falls, putting a further dent in already chronically weak levels of affordability, said HIA senior economist Tom Devitt.

The Reserve Bank of Australia raised interest rates in quick succession in the first half of the year and has continued to signal that stubbornly high inflation means further increases are possible.

The federal government also raised taxes on property investors in the May budget, putting further pressure on the housing sector.

Some economists expect house price falls of more than 10% in the current cycle before a slower economy opens the door to lower interest rates in 2027.

The HIA index is calculated for each of the eight capital cities and seven regional areas on a quarterly basis and considers the latest dwelling prices, mortgage interest rates and wage developments.

"Even with dwelling prices declining in a number of markets, led by Sydney and Melbourne, rising interest rates continued to push up mortgage costs faster than incomes," Devitt said.

It now takes 1.9 average incomes to comfortably service a mortgage on a median priced dwelling in Australia's capitals, and 1.8 incomes in the regions, the data showed.

"Rising interest rates, surging fuel costs and Australian government tax hikes and restrictions on investors have damaged market confidence this year, Devitt added.

Home buyers, especially investors, have pulled back from the market, causing dwelling price declines to continue and broaden into the second half of the year.

"This will not be the makings of a sustainable improvement in affordability because it does not address the fundamental demand-supply mismatch that persists in Australian housing," Devitt said.