Every bubble has a story. The dot.com bubble was based on the principle that technology would massively increase corporate profitability. The Mississippi bubble was spurred by the mistaken belief that Louisiana tobacco trade would generate huge earnings. Closer to home, Australia’s residential housing bubble has been supported the myth that Australian capital cities are suffering a desperate housing shortage, which has led to the price of residential dwellings in all Australian capital cities being “bid up”.

For the myth to grow, it must be supported by “experts” — these experts, usually backed by an unquestioning media, will give credibility to the claims. In Australia, most housing experts, including Macquarie Bank sage Rory Robertson, the Housing Industry Association, various Real Estate Institutes and the Property Council of Australia and the Reserve Bank of Australia have all, at various times, claimed that housing demand is vastly exceeding supply of housing and that it is the shortage (rather than the increasing use of leverage) is the driver of higher housing prices.

The “shortage” claims have reached a crescendo as property prices spiked in the past 12 months. In Melbourne, RP Data has found that median price have risen by 18.2% in the past year, while Sydney prices have leapt by 11.3%. Nationally, prices are up 12.1%.

A shortage of housing is a possible reason for the price rises — but to credit the “shortage” for the price increases is to ignore the substantial effect of government distortion of the property market (through state and federal home owner’s grants) and more importantly, the continued increase in mortgage debt (which has risen to be 90% of GDP).

Most pertinently, if there really is a shortage of residential property, then there almost certainly be a steep rise in rental costs alongside any increase house prices. In fact, it is possible that rental prices would be even more affected by changes in housing demand as property managers often manage a large portfolio of dwellings and are able to quickly increase weekly rentals as demand rises.

But according to statistics released by RP Data this week, this has not occurred. In fact, RP Data has found that in the past quarter there has been no increase at all in the cost of renting a house across Australia. Apartments managed to eke out a 1.4% gain. Over the past year, rentals have risen by only 2.9% — similar to the national inflation rate.

Stagnant rental costs have made buying a home even less attractive when compared to renting. While there are certainly advantages to owning a principal residence (largely lifestyle and tax reasons), the difference in the cost of renting to purchasing a median property has become very substantial. According to RP Data, the median rental cost in Australia is $350 a week — that is equal to an annual rental payment of $18,200.

By contrast, if you were to purchase the median price property it would cost $468,000. Based on an interest rate of 7% and other costs of owning a property (maintenance, council and water rates and body corporate fees) the cost of owning the median property (using an interest only 100% loan) would be about $35,000 annually (that is before depreciation is considered — an important fact, as the value of a dwelling will decrease over time).

In a rational world, it wouldn’t cost virtually double to own a median property than to rent one. But few people would suggest the property market is rational.

Every bubble, of course, will eventually pop. And while it hasn’t happened yet, the signs aren’t looking good for housing. Clearance rates in the key Melbourne and Sydney markets continued to plummet over the weekend. In Sydney, the clearance rate dipped below 50% while Melbourne’s clearance rate has slumped to 55% (down from more 80% for most of 2009). Clearance rates are an important leading indicator of future demand, with a low clearance rates implying that vendors have yet to adjust their price expectations downwards.