House prices in Australia's capital cities dropped by 0.6 per cent in July, according to the latest figures in the RP Data-Rismark Home Value Index.

On an annual basis, a fall of 2.9 per cent was recorded, although in Sydney and Canberra, capital values rose by 0.5 per cent and 1.9 per cent respectively in the 12 months to July 2011.

Rismark's international economist Christopher Joye explained that the next interest rate decision by the Reserve Bank of Australia (RBA) could be crucial for the Australian real estate sector.

If rates do remain on hold, or begin to fall, we would expect to see Australia's housing market find a base and begin to generate capital gains again, he stated.

Mr Joye added that it would be surprising if the RBA had come to the end of its tightening cycle.

A report published by Savills last month named Sydney as one of ten world class cities for residential property investment.

The firm concluded that the Australian location represented the best value among the so-called old world destinations that also includes London, Paris, New York and Tokyo.