A sharp fall in home building approvals in December has provided further evidence of the slowdown in Australia's housing market.

Approvals plunged 20 per cent in December, due to a 39 per cent fall in approvals for high-density apartments and townhouses, new Australian Bureau of Statistics figures show.

ABS director of construction statistics, Daniel Rossi, said approvals for private sector houses remained stable, with just under 10,000 houses approved in December.

Economists attributed the size of the fall in December approvals to expected volatility in the apartment market – apartment approvals were up 30.6 per cent in November – and said the data shows the housing market is cooling.

Westpac senior economist Matthew Hassan said the recent surge in building approvals was “temporary noise”.

“The underlying tone to approvals is weak,” Mr Hassan said.

Total building approvals fell 5.5 per cent over the 12 months to December.

AMP senior economist Diana Mousina said residential construction remains strong but the peak has passed, as the housing market cools and demand for new dwellings eases.

Ms Mousina expects Sydney and Melbourne home prices to fall by five to ten per cent in 2018, due to a continuing steady supply of new homes, particularly apartments, being built in the eastern states.

Data from CoreLogic released on Thursday showed capital city house prices dropped 0.5 per cent in January, though ANZ analyst Daniel Gradwell said after seasonal adjustments, prices were higher for the first time in six months and widespread price falls are not imminent.

More data from property portal Domain, published on Thursday, shows tighter investor lending has had an impact on the Sydney apartment market, where price growth is at a 15-month low.

The property market remains more upbeat in Victoria, however.

Domain data scientist Nicola Powell said just as Sydney’s days of double-digit growth are ending, unit prices in Melbourne have risen eight per cent, the city’s strongest annual gain in seven years.

According to Housing Industry Australia principal economist Tim Reardon, Victoria is now the ‘shining light’ of the building industry.

“Victoria has been the fastest growing state in terms of population and it is encouraging that new housing supply in the state is responding to the strongly growing demand,” Mr Reardon said.

By Christian Edwards