Just because their is a finite supply, does not mean their is an infinite price. If people can no longer afford to live in their house and they have to sell (unemployment, lower income, over leverage), and the buyers have a lower capacity to buy (ie less credit, lower income) then prices will come down. This movement will be accentuated by those who hold investment properties who will see the trend and want to get out, because i cant imagine they are in it for the yield.
Don't you question why yields on property are only about 3.5% on average in Australia, when the borrowing costs are approx 8%. Does not indicate a massive shortage to me, or if there is one prices have gone a lot further than demand and supply balances could possibly justify.
It is a bit like the arguement on Iron Ore, where people were claiming supply shortages would cause prices to continue rising forever into perpetuity. This is even after prices rose more than 400% in the last few years (the old supercycle). Now demand has come off a bit in China the prices are screaming off. Remember demand is driven by peoples capacity to buy (i.e credit, employment, income)
