After peaking at $601,000 late last year, the median price has fallen to $565,000 - down $36,000.

The 6 per cent slump is the biggest quarterly drop in more than two years and one of the biggest the Real Estate Insititute of Victoria has recorded since the height of the global financial crisis.

It has raised hopes for buyers desperately trying to break into the market and will create speculation over whether a crash is coming.

REIV chief executive Enzo Raimondo said that although it was normal for prices to ease at the start of the year, it was clear the market had turned after an astonishing period of runaway growth.

"The honeymoon for sellers is over," he said.

Housing Industry Association economist Matthew King said Melbourne's "red hot" 20 per cent growth last year was ending because of the sting of seven successive interest rates and prices that had become out of control for too many people, turning them away.

"We would expect very little, if any annual growth this year," Mr King said.

"Mortgage lending rates are above average again and that has taken the wind out of the sales.

"Of course certain areas will continue to perform better than others. You would expect inner suburbs to still do well."

Affluent areas were hammered in the March quarter. Essendon suffered the biggest hit, down 18.2 per cent to $900,000.

Balwyn slid 8.4 per cent to $1,475,000. Brighton slipped 7 per cent to $1,508,500.

It is the worst performance for Melbourne homes since a 6.7 per cent fall in the December quarter of 2008. However, the median is still 8.7 per cent higher - $45,000 more - than in April 2010.

Units, apartments and town houses dropped 4.2 per cent for the quarter to $460,000. Melbourne is still the second least affordable city behind Sydney.

Mr Raimondo warned vendors would need to adjust their expectations.

For suburbs recording at least 30 sales in the past three months, Kew was the dearest at $1,945,000.

Most affordable were Wyndham Vale ($307,475), Cranbourne ($325,000) and Werribee ($327,000).

Regional Victoria's median is stable at $320,000.

Yesterday's latest Westpac-Melbourne Institute Consumer House Price Expectations report confirmed people are more pessimistic about the outlook for values.