The bane of first home buyers and the boon of investors for more than two decades, Sydney’s housing bubble looks set to finally – if not quite burst – at least deflate somewhat over the next two years.

Sydney’s house prices are predicted to fall on average by as much as 10 percent by the end of 2019 as banks clamp down on who they lend money to, according to new figures released by ANZ Research.

House prices across Greater Sydney have already fallen by 3.4 percent in the past 12 months – more than any other capital city apart from Darwin (where property values are down 7.7 percent).

Sydney’s inner regions have seen the biggest price drops, while more regional districts – such as the Central Coast and the outer south west – have escaped more or less unscathed.

Sydney's inner suburbs have been hardest hit, with homes in the CBD, falling in value by an average of 13.6 percent in the last 12 months. Picture: Domain (Domain)

The median value of a Sydney property currently sits at $875,816, but this has plunged sharply in key areas.

In Sydney’s CBD and inner south, house prices have fallen dramatically by 13.6 percent since their peak in June last year, while Ryde and the inner west have seen falls of just over 10 percent since August and March 2017 respectively.

On the city’s North Shore, property values have fallen by 8.7 percent, while the Northern Beaches didn’t fare much better, recording a 7.5 percent drop since June last year.

Western Sydney properties have seen smaller property price falls, with the inner south west, Parramatta, Blacktown and the Baulkham Hills/Hawkesbury regions all recording falls of between 5.9 and 6.8 percent.

(9NEWS / ANZ Research)

But it’s not only Sydney that’s seeing a levelling out of the market, with house prices forecast to fall by up to a combined six percent across Australia by the end of 2019.

"Sydney and Melbourne are expected to be the primary drivers of this fall as their high housing prices and highly leveraged households will be more sensitive to tighter credit conditions and rising interest rates,” ANZ economists said in a research note.

But they remain confident that the longer-than-expected market weakness won’t derail the economy, although it may delay an official interest rate rise.

"The weaker housing market reflects a regulatory induced tightening in the supply of credit rather than tighter monetary policy. We think, as a result, that the impact on the economy will be less pervasive."

HSBC chief economist for Australia and New Zealand Paul Bloxham believes given high household debt, the cooling housing market does present a downside risk to the outlook for consumption.

"However, our central case assumes only a modest negative wealth effect, given that households have been building up equity in their properties, rather than withdrawing it, in recent years," he says.

The minutes of the Reserve Bank's June 5 board meeting noted falls in Melbourne house prices had been concentrated in inner-city areas, whereas the declines in Sydney had been more widespread.

A property currently for sale on Wells Street, Newtown in Sydney's inner west. Property prices in the region have fallen by 10.5 percent on average since March last year. Picture: Domain (Domain)

"Nonetheless, housing prices were still 40 per cent higher in Sydney and Melbourne than at the beginning of 2014," the minutes said.

Auction clearance rates in these two cities have also fallen to their lowest levels in a number of years.

Macquarie Securities economist Justin Fabo said while market corrections are always worrisome he believes the regulators would be largely delighted with the orderly cooling of housing markets so far.

"To us the real risk is on the demand side," he said.

He said if households were to lose faith in housing markets given still-elevated prices, the demand for credit could fall more than he expects.

"The main thing to fear for Australian housing is fear itself," Mr Fabo said.