It should not surprise people that Australian house prices dropped last year. What is surprising is how little they fell.

The latest numbers from RP Data show that house prices across Australia’s capital cities fell 0.4 percent in 2012. Melbourne houses lost the most value, with prices down 2.9 percent. Brisbane and Adelaide both lost 0.8 percent. Hobart lost 0.1 percent. Sydney and Perth defied the trend, growing 1.5 and 0.8 percent respectively.

In general, it’s a slow bleed. Nationwide house prices peaked in Australia in 2010 and have slowly shed value since.

The good old days of buying a home and simply watching its price increase year after year are over, says RP Data senior research analyst Cameron Kusher: “We’ve never seen these situations before, and you’d really have to go back to the early 1990s to see similar housing market conditions to what we’ve seen over the last few years, when we had our last recession.”

The big question now is whether or not the slow drip will turn into a gusher.

This is a hugely important question for Australians. Houses are no longer just places to live. For many Australians, it is the single most important investment they have. House prices are the biggest factor influencing household wealth. And for the past two years, home ownership has generally caused families to lose money.

If house prices don’t start rising again, it could destroy the wealth of a whole generation.

And if prices don’t start rising—it will also turn the housing market into something more like a car sales lot. Everyone knows that as soon as you drive off in a new car, it depreciates. After four years, the typical car has lost more than half its value. What happens if houses started acting the same way? Houses age—just like vehicles. Houses break down and need repairs—just like vehicles. Houses get outdated and need updating—just like vehicles.

But will houses continue to deteriorate in value—just like vehicles?

The median-priced house in Australia is $408,000. At approximately 6.5 times household disposable incomes, this is a shockingly high value. Let’s say a typical buyer puts 10 percent down and has a mortgage of $367,000. Now what happens if his house depreciates by 0.4 percent, the same rate house prices fell last year? His investment loses $1,600. That might not sound like a lot, but over the years, it adds up quickly. What happens if house prices fall by a whopping 3 percent, like they did in 2011? All of a sudden, that home owner has lost $11,010.

It won’t take too many years before there are a lot of people trying to get out from underneath what could quickly become debt prisons.

The latest housing market data showed another weak month in December. The Australian Industry Group and the Housing Industry Association reported that housing market activity fell for the 31st month in a row.

Meanwhile, Australia’s builders are doing everything they can to hide falling new house prices and keep people buying.

Property Observer reports that builders and developers are now offering a range of financial incentives and discounts to get people in houses—but in a way so as to not affect comps and thus existing house prices. New home buyers can get backdoor discounts in the tens of thousands of dollars—discounts that are not disclosed in the final sale price.

It is not enough that the builders are giving away new cars, offering large cash-backs, free landscaping, or paying a buyer’s energy bills for three years.

Now developers are offering perks like: $10,000 visa gift cards, land rebates of up to $30,000, and a full year’s worth of paid mortgage payments.

These incentives are a sign that Australians have reached max house price carrying capacity—and that builders are getting desperate.

Like in the United States, surging home prices were fueled by debt. Since 1995, total mortgage loans have risen from A$154 billion to A$1.2 trillion—almost an eightfold increase. Total household debt rose from 68 percent of disposable income to a peak of 153 percent today. At the same time, to afford ever escalating house prices, most families have adopted the two-income strategy. There is no third income available to push family borrowing capacity—and thus house prices—higher. To the contrary, if the economy slows down and unemployment rises, Australians will see just how leveraged house prices are to the economy. All it will take is for one of the debt-inundated income earners to lose his or her job, and the for-sale sign will pop up.

The housing market in Australia is cut. All that remains to be seen is how bad the cut is and whether the slow bleed will turn into a hemorrhage.