SYDNEY -- Average home prices are now 2.1% higher compared to a year ago, according to the Australian Bureau of Statistics.

So much for the bursting of the housing bubble predicted by many.

Capital-city house prices rose by more than analysts had expected in the December quarter, with data showing the weighted average of house prices across Australia's eight capital cities rose 1.6% in the three months to December. Hobart was the only capital where house prices lost ground during the quarter.

Prices rose despite dwelling approvals unexpectedly falling 4.4% in December, suggesting that higher house prices are not yet leading to new-home construction, but that may come in the next quarter or so.

Meanwhile, Bloomberg is reporting that Australian homebuilders are resorting to discounts, gift cards, and paying mortgage payments to entice buyers.

Australia's largest residential developer, Stockland (ASX:SGP), is giving rebates and gift cards of as much as $30,000 in the eastern states, while Devine (ASX:DVN) is matching deposits in South Australia and taking over the first year's mortgage payments in Melbourne.

It seems the RBA's rate cuts of 175 basis points since 2011 and state government efforts to stimulate demand have failed to ignite the property sector amid slowing job growth. Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios, said: "Affordability based on mortgage costs has improved, but people are worried about losing their jobs. House buyer confidence isn't there."

Analysts have suggested that Stockland, Peet Limited (ASX:PPC)Australand Property Group (ASX: ALZ), and Mirvac Group (ASX:MGR) could report negative earnings surprises, with property developers saying they are facing the worst conditions in 20 years and expect little change in 2013.

The Foolish bottom line
Industry group Master Builders Association recently stated that the building industry was unlikely to see a reversal of this downturn anytime soon. The property industry looks ready to have another tough year ahead.

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