Perth’s red-hot housing market could be heading for a sharp reality check as economists warn Australia is on the brink of its biggest property correction in 40 years.

Former Treasury economist Leith van Onselen said a toxic mix of rising interest rates, worsening affordability, slowing economic conditions and weakening buyer confidence was creating a “perfect storm” for home values nationwide — with signs Perth is finally beginning to cool.

The warning comes after the Reserve Bank last week lifted the cash rate another 0.25 percentage points to 4.35 per cent — the third increase this year — and flagged inflation remained a major concern.

“We’ve just had three consecutive rate hikes, we’ve got rates back up where they were at last year’s peak before the Reserve Bank of Australia started cutting in February last year,” Mr van Onselen said.

“And the markets are still tipping at least one more rate hike.

“The RBA was incredibly hawkish in their commentary on Tuesday’s rate hike ... they were very concerned about inflation.”

Perth has been one of the nation’s strongest-performing housing markets over the past two years, fuelled by population growth, a chronic housing shortage and booming rents.

But cracks are beginning to emerge.

Property analyst Catherine Cashmore said reports from sellers on the ground suggested momentum in Perth was fading.

“I’ve been hearing a lot of news on the ground from people that are selling in Perth who are saying that the market is softening there,” she said.

“It all feels a little bit dismal.”

The comments will send a chill through WA homeowners after Perth became one of the country’s standout boom cities while Sydney and Melbourne struggled under affordability pressures.

AMP senior economist Shane Oliver said Perth was still recording growth but the pace was clearly slowing.

“Prices fell in Sydney and Melbourne and while the boom time, mid-sized cities of Brisbane, Adelaide and Perth remained strong, they are seeing slowing growth too,” he said.

“The slowdown reflects a combination of rate hikes, buyer uncertainty associated with the Iran war and its impact, and increasing uncertainty around the tax treatment of property going into the budget, along with poor affordability.”

Mr van Onselen said Australia was likely to follow comparable economies such as New Zealand and Canada, where housing prices have already fallen by about 20 per cent.

Fresh data from Cotality shows housing conditions are already weakening across the nation.

Its daily dwelling values index across the five major capitals rose just 0.03 per cent over the past 28 days, with Sydney and Melbourne down 0.7 per cent. Brisbane’s growth also slowed sharply.

Cotality research director Tim Lawless warned Australia was “on the cusp of a housing downturn”.

“Sydney and Melbourne are already five months into the early phases of decline, while growth is slowing across the mid-sized capitals,” he said.

“Listings are picking up as demand softens, interest rates are rising while affordability and serviceability pressures are biting.”

Ms Cashmore warned Australia was heading towards a recessionary environment that could hammer property prices and businesses.

“We’re heading into a full blown recession, where we will see property prices drop but we’ll also see businesses go out of business, panic in the stock market,” she said.