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Signs are ominous for the property market. Average house and unit prices fell sharply in the March quarter, auction clearance rates in Sydney and Melbourne plunged, and distressed sales of apartments in over-supplied inner-city areas spiked. Some prominent real-estate agents and property developers – who usually always try to talk the market up – admit that prices are down and buyers are fleeing.

Is this the start of a property crash? The truth is that nobody – not even the Reserve Bank of Australia – knows how this property downturn will unfold. The wild card is household debt: it is so high that even a small rise in interest rates could hurt investors and home-owners who borrowed too much to buy their properties.

As in all bubble situations, many who bought late in the boom will be the first to sell in the bust – sending prices in some property markets sharply lower.

The evidence suggests that the property market will deflate gradually rather than spiral out of control. But much depends on interest rates and unemployment. Falling house prices and home lending mean the RBA is in no hurry to lift interest rates, and can cut them if the property market does tank. Household finances, despite two rate rises last year, are still sound and unemployment is falling. It would take a sharp rise in interest rates and a sharp fall in employment to damage the property market badly. That is unlikely.

It is worth remembering, too, that there are many diverse segments within the property market. As BRW property writer John Stensholt notes in this Cover Story, the fallout from the slump in inner-city apartments in Sydney and Melbourne is getting uglier by the day. But prices for established homes in those cities are still robust; although they might have fallen 5-10% in some suburbs, the losses are small compared with the huge gains over the past five years. Prices for established homes in other markets, such as Brisbane and Perth, are still holding up well.