Sydney’s median house price fell by 3.1% in the December quarter 2015, the first fall since June 2012, according to the Domain House Price Report out today.

It was the largest quarterly drop on record say Domain and comes after 3 years of soaring property prices. Sydney House prices are up 52.6% or around $349,000 according to the report, including a gain of 14.8% in 2015. Melbourne median house prices jumped a similar 14.5% in 2015.

According to the report, all areas of Sydney experienced declines, apart from the west, which increased 1.8% and the south-west, which remained flat. The biggest losses were felt in Canterbury-Bankstown with a fall of 5.3%, and the south, which was down 4.3%. The city and eastern suburbs also saw prices fall – down 4.1% over the quarter.

Domain Group senior economist Andrew Wilson says the median Sydney house price is likely to fall back below the $1 million dollar mark. “This is quite a sobering, startling result. The rollercoaster of house price growth Sydney has been on has clearly crashed,” he said. Mr Wilson suggested the falls were sentiment-driven, partially due to banks increasing interest rates for both investors and owner-occupiers in October 2015.

AMP Capital chief economist Shane Oliver noted that rising mortgage rates, restrictions placed on investor lending, a surge of new apartments and a slowdown of Chinese buyers in the Sydney market were all behind the sluggish result.

Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) all increased interest rates for borrowers, but also increased their loan-to-valuation ratios (LVR) for property investors – which requires higher deposits. That has seen a mass exodus of property investors from the market already and is likely to continue. All four banks also increased their mortgage rates for both investors and owner-occupiers.

Foolish takeaway

Last year, we warned a number of times about the potential for property prices to fall – despite what many homebuyers seem to think – so this news doesn’t come as a surprise. Further falls are likely too – house prices just can’t sustain consistent growth of 14% or 15% each year without a pullback.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.