By rights, the four interest rate cuts in four months that have taken the official cash rate to 4.25 per cent, its lowest since December 2001, should be putting a rocket under house prices. The four cuts have saved about $740 a month in repayments for someone with a $400,000 mortgage.

But there are headwinds keeping a lid on house prices. One of the most important is that people are worried about their job security and are reluctant to take on more housing debt.

The Australian economy grew by just 0.1 per cent during the September quarter when the market was expecting it to grow by twice as much. Lending is at 25-year lows.

Unemployment is expected to rise to 5.5 per cent next year from 4.3 per cent now, though some economists are expecting unemployment to reach 6 per cent.

But there are plenty of factors working on the side of higher prices. Immigration is running at record levels, there is an undersupply of houses and there has been an increase in government grants to first home buyers.

The big question is whether the cuts in the official cash rate will be enough to put a firm foundation under house prices, or whether doom and gloom will outweigh the lower mortgage costs and see property prices move further down.

"Property prices are down in general between 10 per cent and 20 per cent and I believe they could fall a further 5 per cent," says chief executive of McGrath Estate Agents in Sydney, John McGrath.

"Those who are predicting a 40 per cent decline are out to sell headlines rather than provide a realistic view on the likely asset revaluation."

He does not know whether the clouds will lift in 2009 or 2010 but says a lot of smart investors have been hoarding cash for when they sense a stable bottom in share and property markets.

The chief economist at AMP Capital Investors, Shane Oliver, expects overvaluation, low rental yields (though growing) and rising unemployment to more than offset the positives of falling interest rates, increased first home owner grants and housing undersupply.

"On balance, we see average house prices falling another 10 to 15 per cent over the year ahead," Oliver says.

"Housing finance is continuing to fall, new home sales are falling and weekly auction rates are running 20 to 30 percentage points below a year ago."

Oliver says for the past four years house prices in the western suburbs of Sydney have been very weak. And, as unemployment rises, there will be an increase in delinquencies and defaults.

He also says the weakest areas in Sydney are the ritzier suburbs. "One million dollar and higher-priced houses are under quite a bit or pressure. Some people are having to sell their investment properties and their holiday homes and, in some cases, they have got to downsize the family home," he says.

Melbourne houses were never as overvalued as Sydney houses, he says. However, in terms of the suburban breakdown, it is a similar story to Sydney.

Prices in the wealthier areas of Melbourne are under pressure. But Sydney is being hit harder because it has a bigger financial-services sector than Melbourne and the NSW economy is particularly weak, Oliver says.

The managing director of researcher BIS Shrapnel, Rob Mellor, is more optimistic. He thinks most of the price declines in Sydney and Melbourne have already occurred but both markets will remain soft into the first half of next year.

Mellor says median prices mask the difference in the performance of the markets within each city. The median prices have fallen because of the bigger falls in top-end prices.

"I think we will start to see a stabilisation in prices at the lower end next year with more first home buyers in the market and investors returning to the market," he says.

Housing demand and sales activity should increase in the second half of next year. Mellor says house prices could start to come back in both cities by 2010 as lower interest rates and the increase in the first-home buyer grant takes effect. However, more economists are becoming pessimistic on the likelihood of Australia avoiding recession.

Who will be right?

For most Australians their house and super are likely to be their most valuable assets.

So arguments about the future of house prices stir up passions rarely present when talking about other investments.

Will house prices plunge as they have in the US, down on average 20 per cent, as Australia's economy slows and unemployment rises?

Macquarie Bank economist Rory Robertson does not think so, while University of Western Sydney economist Steve Keen does.

Roberston says Keen underestimates the power of the stimulus to the economy provided by lower interest rates and Government spending.

Keen says Australia's record-high level of household debt to GDP, which is one of the highest in the world, will lead to Robertson's theory failing. While falling interest rates reduce the repayment burden on households, Keen says households will reduce their spending by even more, driving the economy into recession and house prices much lower.