Decreasing values of house-and-land packages are one of the biggest reasons behind Australia’s weak inflation figures, according to a report by the Australian Financial Review.

Data showed that Melbourne led the decline. New dwelling prices in Victoria’s capital dropped 1.2% the March quarter, contributing significantly to an overall 0.2% decline in new owner-occupier homes across the nation.

"It came from Melbourne. That new project homes in Melbourne are offering large, large discounts is showing up in [Consumer Price Index] numbers,” Kaixin Owyong, National Australia Bank (NAB) economist, told the Australian Financial Review.

Developers are offering discounts and incentives worth up to $45,000 to boost sales in a market that is now falling drastically.

In a wider context, though, the current condition of the housing market is hurting inflation in the country. Established home prices are not included in the goods and services that form part of the Consumer Price Index inflation, but new dwellings and rents each carry a 10% weighting in the measure the Reserve Bank of Australia (RBA) strives to keep between 2 and 3% over the medium term.

Cooling figures put core inflation at a quarterly rate of 0.3%. The annual rate, meanwhile, was at 1.6%—much lower than the RBA's forecast of 1.8%.

Falling rents, which also caused inflation to slide, had the potential to dampen inflation for a longer time, according to Owyong.

Sydney rents decreased by 0.2% in the March quarter, marking their first decline in over 25 years.

"It’s possible what happened in house prices could bounce next quarter, but we’re unlikely to see rents to turn around," Owyong told the Australian Financial Review. “Rents are going to be weak for some time."