Australia's property market is showing signs of cooling, with national home prices down in the December quarter and conditions expected to remain softer throughout 2018.

The national median house price index fell 0.3 per cent in December, weighed down by major falls in Sydney and Darwin and modest weakness across Melbourne and Perth, figures from property data group Corelogic show.

The fall contributed to an overall slowdown in national home value growth for the year, with prices rising a mere 4.2 per cent in 2017 compared to 5.8 per cent in 2016 and 9.2 per cent in 2015.

Head of research Tim Lawless says the transition towards weaker housing market conditions has been clear but gradual, and has been driven by the capital cities which combined tracked half a per cent lower over the December quarter.

“Sydney’s housing market has become the most significant drag on the headline growth figures,” Mr Lawless said in a statement on Tuesday.

The harbour city’s dwelling prices retreated 0.9 per cent in the month of December to be 2.1 per cent lower over the quarter.

“The city’s annual rate of growth is now tracking at just 3.1 per cent; a stark difference to the recent cyclical peak when values were rising at the annual rate of 17.1 per cent only seven months ago,” Mr Lawless added.

Home values in Melbourne fell for the first time since February 2016, with dwelling values slipping 0.2 per cent lower in December, but they were up 0.9 per cent over the quarter and 8.9 per cent for the year.

“The city’s housing market has been far more resilient to negative growth compared with Sydney due to factors such as stronger population growth, lower affordability hurdles and a higher rate of jobs growth,” he said.

“However, the growth trend has been clearly moderating since late 2016.”

Hobart was the best performing capital city in 2017 with home prices rising 12.3 per cent, almost five times higher than the city’s decade average annual rate of capital gain.

But the city’s home prices remain extremely low relative to the larger mainland capital cities, Corelogic said.

Mr Lawless expects tighter credit policies to be the primary driver for a softer phase in the housing market cycle throughout 2018.

“The trajectory of the housing market through 2017 has been similar to conditions in 2015/16 when the first round of macro prudential measures announced by APRA (Australian Prudential Regulation Authority) impacted the availability of credit for investment purposes,” he said.

“We’re likely to see lower to negative growth rates across previously strong markets, more cautious buyers, and ongoing regulator vigilance of credit standards and investor activity.”

By Simone Ziaziaris