It's hard to say what you should do without knowing more about your personal circumstances. I personally would pay off the credit card and as much of the loan on the rental property. Being debt free is a good thing. Especially if you're unemployed.
Given that the FHOG is a bigger proportion of your price range, you will have less risk of losing equity after the FHOG is removed. Property prices don't fall too fast because people hold out on selling as long as they can. You're more likely to see significant falls until 12-18 months after the FHOG is removed.
I'm glad the FHOG is being reduced too. If only they took it away completely. If you can't save a deposit, then how are you going to pay off a $400k loan? The intention of the FHOG may have been good, but the effect is not. That is going to become clearer over the next couple of years.
I would say that the first home owner's grant has made a lot of people greedy. And the market hasn't fallen much here yet. I don't think we're near the bottom yet.
I would sell. Reducing the mortgage on your main home will reduce interest which is a guaranteed way of becoming wealthier. Consult a tax accountant for principle residence rules. There should be a way to avoid CGT.
The time to invest in property again will be when incomes are high, or at least normal relative to house prices. At the moment, the best capital result you could hope for is a flat one (ie no capital loss). This is why Steve recommends cash flow positive investing. -If you're unlucky, you'll start losing capital, but at least you won't be losing capital AND income.
For an investment as big as a house you'd be crazy to not consult a solicitor for the contract. I wouldn't concentrate so much on the fees as the price you're paying for the house. That is far more material. Don't forget to think how you'll cope if interest rates go back to 7.5%. Or how you'll feel when house prices come back to their normal level relative to the average income.
Age is not such a barrier, but I would recommend saving a bigger deposit (plus a buffer) and waiting until unemployment looks like it is going down. At the moment it's going up. http://financialdisasters.blogspot.com This could be a few years away. Better to be patient rather than paying tens of thousands of dollars too much. You won't make money that way.
