Is Australian residential housing heading for a price bubble? Probably, but like most other people I'm not about to sell up with the hope of cashing in at the top and buying back at a lower price in a few years' time. The transaction costs alone would amount to a round trip (selling and buying back) of at least $100,000. And there would be the hassle of finding somewhere to rent and so on.

But whenever house prices rise, I groan because the risk of a crash gets another ratchet up. Almost any way it is looked at, prices appear high by international standards. Prices have far outpaced the growth in inflation and household income. Most economist say prices are justified mostly by an imbalance of supply and demand - high immigration and not enough land being released by state governments on the fringes of major cities.

But if it is the main justification for higher prices, it would have to be a very large undersupply. Perth house prices have risen massively over most of the past decade, no doubt driven by the resources boom and the big increases in real wages. Sydney and Melbourne median dwelling prices have doubled in the past 10 years, where population growth has been strong. But even in regional areas, where population growth has been modest at best, prices are booming.

There must be additional reasons why prices have risen so much. Some say it is cultural, to do with home-ownership aspirations shared by most of us. But wasn't that also true in the 1960s and '70s, when house prices did not grow by nearly as much as they have since 2000?

Then there are the tax breaks. There is no capital gains tax on the sale of the principal place of residence. Also, investors can negatively gear. This is where if the interest costs and other legitimate expenses are greater than the rent, the shortfall is used to reduce the income from the investor's salary and pay less income tax.

But these favourable tax treatments have also been around for a while. Does the rapid rise in Australian house prices have something to do with the relaxation of the rules governing ownership of residential property by foreigners? Perhaps, but the changes were introduced only last year.

The one statistic that does seem to offer an explanation is the growth in mortgage debt, which has grown from about 15 per cent of gross domestic product in the 1970s to more than 80 per cent now (a third is for investment property). Financial deregulation, low interest rates and the growth of double-income households have fuelled the debt binge. The massive lending for residential properties is predicated on higher house prices, continuing low interest rates and low unemployment. Combined with undersupply, this seems the most satisfactory answer.

The optimal outcome from here is that house prices mark time in nominal terms. That would allow inflation to do its work - meaning a gradual reduction in real house prices - making it easier for people to get on the first step of the property ladder.

House prices started outpacing household income in 2000. Prices took a breather in 2004 and 2005 and again in 2008, when it seemed the market was correcting itself. Then came the GFC and, as Steve Keen, an academic at the University of Western Sydney, points out, the federal government's stimulus spending, including the increased first-home buyer incentives, put a rocket under the market. While the government's action was entirely correct, it has had the consequence of increasing how much people could pay for houses through government grants for first buyers. It helped re-inflate house prices during 2009, which appears to have continued into this year regardless of rising (but still low) interest rates.

High mortgage debt levels make the economy much more vulnerable to shocks than if mortgage debt was lower. For most other developed countries, the level of government debt makes their economies vulnerable. For Australia, mortgage debt is the Achilles heel.