Auction clearance rates dropped to about 65 per cent in Melbourne and 55 per cent in Sydney (and far lower in Brisbane). Since the Reserve Bank is threatening more rate rises, it is not a question of if a housing correction will happen, but when. Consider this: in 1994 the average annual wage in Australia was $28,080. By 2010, it had risen to $50,824. That is a very healthy increase of 80 per cent. If people spent the same proportion of their income on their home in 2010 as they did in 1994, that would have resulted in an 80 per cent increase in house prices (subject to other factors being equal, such as number of people working in each household). But property prices have risen far more. In 1994, the median property price was $148,800, while in 2010, RP Data found the median was about $450,000. That is an increase of more than 200 per cent. Had property prices increased at the same level as wages, the median house price in Australia would be about $267,000 - 41 per cent below what they are. (By contrast, had house prices simply tracked the consumer price index, using 1994 as a base, house prices should be $230,640 - or about 49 per cent lower than at present).

These figures are not altogether different from findings in The Economist, which determined that houses in Australia were overpriced by 56 per cent, making them the world's most expensive based on a price-to-rent comparison. While housing bulls will point to a shortage of property or rising incomes, the real reason for house price increases is far more nefarious. Since 1994, the ratio of housing debt to housing assets has risen from 15.8 per cent to 28.7 per cent. So even though house prices have increased, the increase in the proportion of debt used has been far greater. Almost all the outperformance in the housing market can be attributed not to any shift in the fundamentals of people having more disposable income, but to people borrowing more. The Noosa experience has shown that Australian housing prices are not immune to basic laws of investment. As the price of an asset rises, its yield falls. It means that to justify a higher intrinsic value, the future income generated by the asset must also rise. That has not happened with housing. This is because the increase in house prices since 1994 has not been driven by higher rentals (or higher household incomes), but because purchasers are using more leverage to pay more for the same asset. Unsurprisingly, rental amounts have increased at a relatively similar level to household earnings. As a result, net yields on housing in capital cities have slumped to about 2 per cent - far lower than the return one can receive in the bank.

As in the United States, the culprit in the rapid price rises in property has been mortgage lenders, who have effectively funded the boom. And just in case you thought the banks had learned their lesson, last week Australia's largest home lender, the Commonwealth Bank, announced it would allow mortgage customers to borrow up to 95 per cent of the ''value'' of the property, up from 90 per cent. This will have the dual effect of increasing the bank's short-term profits and further increasing the bank's risk profile by exposing its balance sheet to even more over-priced housing. An asset can be valued with reference to the income it generates, not by how much someone (using mostly other people's money) is willing to pay. As many property buyers will soon find out, price and value are two very different beasts. Adam Schwab is the author of Pigs at the Trough: Lessons from Australia's Decade of Corporate Greed