"Based on CoreLogic data, as well as other indicators, it's fair to say that growth conditions appear to be slowing in Sydney and Melbourne while the performance across other capital city regions remains mixed. The housing market remains as diverse as ever and the flow of data over coming months will be critical to get a better understanding of the trends."
It comes after largely flat April results.
"The May home value results should be viewed in the context of demonstrated seasonality - values have fallen during May in four of the past five years," said Lawless.
"Reading through the seasonality indicates that value growth in the market has lost momentum, particularly in Sydney and Melbourne where affordability constraints are more evident and investors have comprised a larger proportion of housing demand."
Lawless said recent crackdowns by regulators on interest-only lending, announced at the end of March, were "adding to the complexity in reading the current market".
"Mortgage rates are continuing to trend higher, particularly for investors," he said.
"Another factor that is likely contributing to slower growth conditions is a dent in consumer confidence. Consumer sentiment towards housing, as measured by Westpac and the Melbourne Institute, has shown a marked downturn in May.
"In particular, the Westpac 'time to buy a dwelling index', fell 6.5 per cent over the month. According to Westpac, 'consumer sentiment towards housing shows an increasingly negative view'."
It comes as the NSW government announces a suite of new housing affordability measures, headlined by a massive hike in fees and taxes on foreign property investors that will raise billions of dollars to help first homebuyers.
The Foreign Investor Surcharge Duty will be doubled from 4 per cent to 8 per cent from July 1, while the annual land tax surcharge on foreign buyers will rise from 0.75 per cent to two per cent a year, The Daily Telegraph reports.
The measures are expected to raise $2 billion over the next four years. Meanwhile, first-home buyers in NSW who are buying existing properties worth up to $650,000 will be exempt from paying stamp duty, says the ABC.
Currently the exemption is only available for purchases on new properties. There will also be a range of changes to first-home buyer grants. The package will be taken to cabinet on Thursday with an announcement from Treasurer Dominic Perrottet, Planning Minister Anthony Roberts and Premier Gladys Berejiklian expected later in the morning.
Berejiklian vowed to make housing affordability one of her key priorities when she came in as premier in January.
The major banks have been jacking up mortgage interest rates despite the Reserve Bank keeping the official cash rate on hold at 1.5 per cent since last August.
According to CoreLogic, discounted variable mortgage rates for investment purposes have risen by 25 basis points on average through to the end of April 2017, and discounted variable rates for owner occupiers are 10 basis points higher.
The research firm says even though mortgage rates remain low, higher repayment costs are likely to have a dampening effect on housing demand against a backdrop of record high household debt and record lows in wages growth.
"Mortgage rates could edge higher over coming months as lenders accommodate recent macroprudential announcements within their credit policies," Lawless said. "The funding levy announced in this year's Federal Budget could also see higher mortgage rates as lenders potentially pass on some of the associated costs."
- additional reporting AAP.
