Something really alarming is going on in the Sydney and Melbourne property markets, where median house prices jumped again in the September quarter, despite growing warning signals of a dwelling over-supply.

The latest Australian Property Monitor survey, released Thursday, found that Sydney’s median house price was up 2.7 per cent over the quarter, to $1,068,303, with Melbourne’s up 3.1 per cent to $773,669.

That pretty much blows out of the water the RBA’s hope that super-low interest rates would not reignite those cities’ bubbling housing markets.

It’s not all due to interest rates, of course. Both cities have had large influxes of migrants – especially Melbourne – and decent jobs growth.

But then both cities are exhibiting house prices that are way out of reach for many first-home buyers, and both are facing a growing risk of an apartment price bust that has scared banks into lowering the amount they’ll lend on multi-dwelling developments.

Why worry?

What then, are home buyers to think? This property bubble has run for so long, to such extraordinary heights, that bidders are apparently shrugging and assuming it will run on and on.

What’s most alarming about those sky-high prices is their vulnerability to shifting structural forces that nobody – politician, banker, property spruiker, vendor or even buyer – can now stop.

And yet some still try, as Treasurer Scott Morrison did on Monday when he blamed prices on a lack of supply – and ignored more obvious causes.

That is surely true for pockets of residential property, but it cannot be true across the board as new figures from investment bank Morgan Stanley show.

It calculates that the imbalance between supply and demand in the dwelling market is shifting rapidly to one of over-supply (see chart below).

That calculation compares the number of building completions on the one hand, with natural population growth, net overseas migration, household size, demolitions, and secondary homes on the other.

Supply and demand are slippery concepts in the housing, for two reasons.

Firstly, as noted above, a normal supply and demand chart that explains the price of a cup of coffee or litre of petrol is, in the housing market, routinely distorted by interest rates – not many people take out loans to cover their petrol and caffeine addiction.

So house prices are a result of not two, but three main determinants: supply, demand, and the price of credit.

The flip-side of under-supply

The second slippery factor is what I have previously described as “over-demand”.

This is demand for housing that is not directly related to the number of families or individuals available to live in the home and, therefore, to pay a mortgage or rent.

That can be from speculators who don’t have time to rent out a property before ‘flipping’ it to another buyer; overseas buyers using the bricks and mortar as a store of value, as they might a gold bar; the demand for second homes such as holiday homes; and the demand just to get away from everyone else and live alone.

While many economists regard all those factors as simply being ‘demand’, they don’t have much to say about a structural ‘under-supply’ of housing, because all of them can fall away when the market experiences a shock.

Speculators vanish. Foreign buyers house-hunt in other nations. Holiday homes flood the market. And grumpy Joe, who would rather live alone, moves back in with friends or families to save money.

What the Morgan Stanley estimates show is that a supply shock is already underway.

Far too many apartments will hit the market in the next 18 months. While that will cause a ‘hard landing’ in apartment prices, according to Morgan Stanley’s analysts, in the detached dwellings market it will be less pronounced.

Like King Canute’s tide, the apartment glut cannot be held back.

Nonetheless, that will occur at the same time as renters and buyers are seeing stagnating wage growth and, in the case of 2 million workers, either fewer hours of work than they’d like each week or none at all.

Those two factors are ‘baked in’, easily for the next 18 months.

They are like the tide that the King Canute of legend tried to turn back.

Not only did the King get wet feet, in that story, but he was wasting precious time – he’d probably have been better off inland, selling off one or two of his holiday castles.