The RBA's interest rate cuts don't seem to be working. It's a bit player in the global currency war, and Australia's economy will suffer the consequences. Manufacturing's woes are well known. But the RBA's move to ultra-low interest rates was supposed to perk up Australian house prices, and therefore the housing market.

But data released yesterday by RP Data-Rismark suggests the Australian housing market continues to fall. The Sydney Morning Herald reports that:

'Australian home values fell for the second year in a row in 2012, marking the worst performance for the national market in 16 years.

The 0.4 per cent decline has come on the back of a 3.8 per cent fall the previous year, according to analysts RP Data-Rismark.'

That's not good news if you've bought a house in the past few years. Housing is a highly leveraged investment. For new purchases, the finance structure can be as high as 90% debt, 10% equity. So a 10% fall in house prices wipes out your equity.

But you've also got to factor in debt servicing costs. Despite the RBA's efforts, mortgage rates are still high. The SMH article states:

'Industry experts point out that while the RBA has cut the cash rate to a GFC-era low of just 3 per cent, mortgage lending rates remain significantly higher.

'In April 2009 a standard variable-rate home loan was available at 5.75 per cent. Today, the rate is set at about 6.45 per cent.'

So the 'cost' of a $300,000 loan for example, is over $19,000 per annum. Add on this cost to a loss of capital value and it's no wonder housing isn't a compelling investment right now. From around 1995 to 2010, Australian residential property enjoyed the bull market of a lifetime. Don't expect it to come back anytime soon.

Of course the recent pick-up in China could assist the property spruikers for a few more months at least...

China's 2012 slowdown spooked the country's leadership (both old and new) and they subsequently halted efforts to reform and rebalance the economy. In the latter part of 2012, they juiced up the credit engine again and went full throttle on the infrastructure spend.

I don't expect it to last very long, but the resultant surge in iron ore prices (which will impact on Australia's terms of trade) will provide another national income boost and possibly assist in halting the slide in Australian property prices for the early part of 2013.

Don't be misled though, China is at the tail end of an epic credit bubble. 2013 could be the year it finally goes 'pop'!

Regards,

Greg Canavan
for The Daily Reckoning Australia