Australia's two biggest property markets have been forecaste to experience price drops of up to 10 percent over the next two years as banks clamp down on who they lend money too.

ANZ senior economists Daniel Gradwell and Joanne Masters predict that by the end of 2019, Australia's house prices as a whole will fall up to a combined 6 percent, with Sydney and Melbourne set to suffer the most.

"Nationwide, ANZ Research expects housing prices to decline by 4 per cent in 2018 and a further 2 per cent in 2019," the economists predicted in a research note.

"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 Research forecasts both cities will see prices fall around 10 per cent peak-to-trough, with Sydney faring slightly worse than its southern peer."

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(AAP)

(House prices are tipped to plunge by up to 10 percent over the next two years. Image: AAP/iStock)

Capital cities are set to fall the hardest, while regional centres and rural towns are forecast only to experience moderate reductions in house values.

ANZ forecasts only two cities to experience house price growth well into 2019, with Canberra and Adelaide tipped to buck the trend and increase incrementally.

The economists signalled a range of economic indicators – including real house prices, plummeting auction clearance rates and lacklustre home loan approvals – as symptoms of a housing market correcting itself.

A tightening of credit lines from the banks, particularly in the ongoing wake of the Royal Commission, is largely thought to be the primary driver of falling house prices.

In the research note the economists predicted that interest rates will likely remain on hold for at least another 12 months.

The Reserve Bank of Australia has held a 1.5% interest rate for the 20th-straight month.

"ANZ Research sees the risk credit continues to tighten through to the end of the year," wrote the economists.

"Beyond that, ANZ expects interest rate hikes from the Reserve Bank of Australia in the second half of 2019 to act as a further headwind to prices, seeing further – albeit much more modest – house price declines in 2019."

Despite the doom and gloom of the forecast, the economists did say that the Australian economy was thriving while property markets correct themselves to relatively stable levels.

"The good news is Australia’s economic growth is back around its long-term trend, and the outlook is broadly positive," wrote Gradwell and Masters.

"In particular, ongoing employment growth, (gradually) improving wages growth, and population growth running at well above average levels should support house prices in the medium term."

Capital city property prices over the last 12 months:

CAPITAL CITY: CHANGE OVER 12 MONTHS: MEDIAN VALUE: Sydney -3.4 percent $875,816 Melbourne +3.7 percent $720,433 Brisbane +0.9 percent $492,911 Adelaide +0.8 percent $435,042 Perth -2.3 percent $464,238 Hobart +12.7 percent $430,138 Darwin -7.7 percent $433,609 Canberra +2.6 percent $594,486 Combined capitals -0.3 percent $655,419 Combined regional +2.4 percent $364,706 National +0.2 percent $554,605

*CoreLogic Data May 2018