Overall mortgage demand dropped 19.2 per cent year-on-year in September, despite house prices across the country slipping 1.1 per cent, according to data from credit reporting body Equifax.
This was coupled with a fall in new home loan applications, which dropped 22.1 per cent compared to 12 months ago.
Australian households were taking a decisive step back, Equifax chief solution officer Kevin James said.
"This is the largest year-on-year decline in first home buyer mortgage demand since December 2022 and baseline prices for properties remain high despite recent market dips," he told AAP.
Younger people were the hardest hit, as mortgages for 18-25 year olds fell by a quarter, and those for 26-35 year olds slumped 22.5 per cent in September.
Aspiring first home buyers continue to struggle in the property market, with several compounding factors such as strict serviceability testing, high interest rates, and spiralling living costs making it difficult for young Australians to achieve the dream of home ownership.
Mr James said that unfortunately, there was no quick fix.
"There is no silver bullet solution, each element needs to be considered when looking for ways to make the market more accessible for this cohort," Mr James said.
Even though property values had been easing, baseline prices were still high — with average first home buyer mortgage sizes hovering at record levels of $743,000.
"For many prospective entrants, bridging the deposit and repayment threshold is likely becoming increasingly difficult without institutional or familial support," Mr James said.
The credit reporting body has also seen signs of friction in refinancing, with lender-switching falling 8.8 per cent compared to a year earlier, after a nearly flat performance in August.
"In the current economic climate, strict regulatory serviceability assessments appear to be holding borrowers in place," Mr James said.
"Many existing mortgage holders wanting to shop around for a better rate are likely finding themselves unable to clear the serviceability needed, effectively locking them into their current arrangements."
Meanwhile, Australians aged 56 and over helped drive a surge in credit cards, ahead of the Reserve Bank's interchange fee cap reduction taking effect on October 1.
Credit card demand rose by a tenth compared to a year earlier, driven by a 36.3 per cent spike among borrowers aged 56 and above.
It's a different story for young people, as 18–35 year olds pull back across the credit spectrum.
Overall, the surge is not expected to continue at the same rate now that the fee cap reduction has been implemented.
"While the interchange fee cap reduction and related changes to credit card rewards spurred credit card holders to churn their card portfolios throughout August and September, it is likely that this specific driver of demand will taper off as consumers secure rewards terms that suit their needs," Mr James said.
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