House sales are falling in Melbourne's highly-prized suburbs amid tougher bank lending criteria and the government's foreign investment laws. There is also a lot of confusion regarding what overseas buyers can and cannot buy.

Among those hit are Chinese nationals, who have been the biggest foreign buyers of Australian property in the past two years. Most of the slowdown is happening in Balwyn, Glen Waverley, and Mount Waverley – areas which were particularly favored by Asian buyers.

According to the changes made by the Foreign Investment Review Board (FIRB), overseas-based buyers can no longer buy new free-standing homes, though they can still buy new townhouses and apartments, subject to FIRB approval.

Lenders have also implemented tougher lending criteria for foreign buyers. For instance, ANZ is no longer accepting loan applications based solely on foreign income. The Bank of Melbourne has also introduced a new system for identifying foreign income. Offshore buyers also have to pay application fees starting at $5000, rising proportionately with the purchase price.

Because of these changes, many new luxury homes targeted towards the overseas market are now struggling to find buyers.

"It's really affected our higher-end sales, between $2 million and $4 million homes, and we're finding they're now just sitting on the market," said Glen Waverley agent Andrew Dimashki of Harcourts Judd White. "Our developers and sellers who are looking to move these properties are really having to break even or selling below costs because they need to find local buyers who aren't prepared to pay these huge prices."