Sydney home prices climbed 5 per cent over winter. and over the past year they have climbed 16 per cent. The typical Sydney house price climbed from $666,900 to $740,000, the typical unit price from $513,750 to $565,000. Melbourne home prices climbed 6.4 per cent over the same period, faster than anywhere else in the nation. Over the past year the typical Melbourne house price climbed from $548,000 to $570,000, the typical Melbourne unit climbed from $440,000 to $460,000. Wages climbed just 2.5 per cent. You don't have to be particularly bright to work out what's going to happen next. Reserve Bank governor Glenn Stevens is bright. He says "people should remember that prices can fall". Nothing is more certain. Here's why. House prices can't keep rising faster than incomes and population growth. Both were strong a few years back. Now only immigration is strong and there's every sign that'll wind back. High population growth and income growth push up rents. Higher rents push up prices as it becomes even more economical to buy than rent as would-be landlords discover they'll make more money by buying.

But it doesn't happen straight away. The lag sets up what economists call a "cobweb cycle". Here's how it works in the labour market: If there's a shortage of engineers and their wages climb, more students enrol in engineering degrees. Four years later they graduate and find there are too many of them. Wages fall back. On a graph the to-and-fro looks like a cobweb. In the housing market rents push up prices with a delay and by the time they've risen more houses have been built and more renters have bought, pushing prices back down. Except that the market gets ahead of itself. We are forever being told that past performance is no guarantee of future returns, but we don't believe it. So when we see house prices rising we act as if we have seen a sign that they are going to keep rising. Even as the drivers turn against house prices (real incomes are falling) we keep buying because others are buying in the expectation they will keep climbing. It can keep happening for quite a while, all the more so if interest rates are at long-term lows and look like they will stay there. Like Wile E. Coyote, the cartoon character who chases Road Runner and runs off the edge of a cliff, our legs keep moving suspended in mid air until we look down, realise there's nothing there and fall. The hard bit is working out when. Complicating things is the emergence of a new class of home buyer. Foreigners, many of them from China, want Australian houses as investments. When they pay over the odds to get them (regardless of the legal limits on foreigners buying existing properties) they push up the price and push out other buyers. The buyers who miss out rent, often from them.

They are pushing up prices in much the same way as did negatively geared Australian buyers who poured into housing after the headline rate of capital gains tax was halved in late 1999. They pushed up the prices of existing properties, elbowed would be owner-occupiers out of the way and rented to them. Both negative gearing and foreign investment are said to boost the supply of properties for rent. But they do it only where the investments are in apartments built off the plan or houses built from scratch. In the main they bid up the price of existing houses and lock out owner-occupiers. When prices start falling they sell, pushing down prices further. Much of our housing boom isn't real. It's inflating prices and swapping the ownership of homes rather than making more. It's a flimsy foundation on which to build economic growth and a sad way to build employment growth. But apart from mining (which is shrinking in importance) it's about all we have. Speaking to the Committee for the Economic Development of Australia in Adelaide on Wednesday governor Stevens berated Australian businesses for playing it safe.

"At some stage, the equity analysts, shareholders, fund managers, commentators and so on will want to be asking not 'where's your cost cutting or capital return plan?', but 'where's your growth plan?'" he said. Loading The main sphere in which we are taking on risk is the one in which we should not. We're betting on "already inflated" house prices rising further. As long as others keep piling on it'll keep happening. But the coyote has left the cliff. Peter Martin is economics editor of The Age. Twitter: @1petermartin