The property market in Australia is seriously unaffordable, according to a recent study, but who didn’t know that? Just open the real estate classifieds and spot the number of seven-digit price tags on generic properties, often located in areas that you’ve never even heard of.

The housing bubble that has finally burst in the US and in the UK could be upon us relatively soon if the results of the fifth annual Demographia International Housing Affordability Survey are anything to go by.

According to the study of 265 markets across Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States – the Sunshine Coast in Queensland takes out the number one spot as the most unaffordable place to buy a home, closely followed by the Gold Coast in third spot and Sydney in fifth. Bundaberg in Queensland, Adelaide, Melbourne, Mandurah and Woollongong also feature in the top 20.

In fact, all markets in Australia were rated as “severely unaffordable” except Wagga Wagga in NSW, Bendigo and Ballarat in Victoria, which were named “seriously unaffordable.” (Last year, the five least affordable markets were located in the United States. This year, three of the least affordable markets are in Australia and just one in the United States. Steep price declines in US markets, particularly California, have knocked many US markets off the list).

According to Demographia, the largest house price decreases over the past year occurred in markets that reached “severely unaffordable” levels – in Ireland, New Zealand and the United Kingdom. Since these markets shot up the most in the boom, they had further to fall. This is concerning news for property prices Australia-wide when almost every market in Australia has hit “severely unaffordable” levels.

Demographia concluded: “Sooner or later, the inherent instability and unsustainability that characterises bubbles will lead to house price declines in Australia.”

The survey noted, however, that the Aussie property market has, so far, stood up to the global financial crisis relatively well. International banks have collapsed, the sharemarket has tanked, Governments have spent trillions on bailouts and Aussie property investors have continued to trade in their homes for lofty prices. No one seems to bat an eye at a $1.3 million workman’s cottage or a $800,000 studio apartment any longer, showing the degree to which Australians have become accustomed to highly inflated property prices.

Some argue that lower interest rates and a boost to the first home-owners’ grant will keep property prices high. And although the heat has come out of the resources boom, our proximity to fast-moving China and India is an advantage that the US and UK just don’t share.

But then again, million dollar price tags on properties generally come with mortgages to match and rising unemployment is the wildcard in today’s market. As businesses lay off staff in response to the global crisis, meeting repayments on mortgages will become burdensome for homeowners. If unemployment rises, the property market has nowhere to go but down.

The objective of this study was to demonstrate what happens to property markets when land use is restrictive; when excessive regulation limits the amount of land available for stgelopment. “Prescriptive land use regulation” is based on “visions” or “plans” that prescribe where stgelopment is to occur. A good example is the South East Queensland (SEQ) regional plan, which provides a framework for managing growth, land use and stgelopment in the rapidly growing region. Huge areas of land are declared off-limits to stgelopment; stgelopers are encouraged to increase densities by forcing more housing into existing urban areas.

Such measures mean that greater demand from housing cannot be met by increased supply.

“The fundamental problem with prescriptive land use regulation is that it prohibits urban land markets from functioning efficiently and creates artificial scarcity values,” the survey noted.

And as we all know, scarcity raises prices.

It found that prescriptive land use regulation brings more chaotic “boom and bust” cycles to the housing market. “They convert what would have otherwise been modest price bubbles into extreme price bubbles.”

Demographia contrasts today’s tightly regulated property market to the era of the “Great Australian Dream” where new starter housing was routinely supplied at extremely affordable prices. Back in the old days, responsive land use permitted the market to supply new housing to millions of households that would otherwise not be able to afford it. “In Australia, Canada and the United States, for example, home ownership rose from approximately 40 percent before World War II to 65 to 70 percent at its peak,” the study noted.

Compare those days to today’s struggling home buyer who is expected to fork out about 8 times income for a basic abode compared to 2.5 times or less back then.

In Australia there is a widening divide between “the Haves” who own property and the “Have Nots” who don’t. While first homebuyers are keen for measures that see housing prices drop to more affordable levels, existing homeowners are thrilled by the prospect of continually rising prices. Land rationing serves the purpose of keeping the nest eggs of the “Haves” topped up.

However that could all flip on its head if the forecasts by Demographia are correct, and Australia’s property market bubble does in fact burst.

The survey, which can be downloaded from Demographia, offers food for thought on the recent property boom in Australia and is certainly worth reading for a different perspective on the affordability crisis.