If you live in Australia, you had better find some hearing protection: A massive popping noise may be about to shatter the hopes and dreams of millions. A housing bubble of California dimensions could be about to explode. When it does, it will probably take the whole economy with it.

Yet Australians don’t seem worried.

Californians used to feel the same way too. Renting is just throwing money away. Buying a house is the best investment a person can make. Immigration is fueling demand. They aren’t making any more real estate. Better buy now or you will be priced out of the market forever.

These were the things that everyone from secretaries to engineers told their employers before quitting to become real estate agents during California’s bubble years.

And for a while, they seemed like geniuses. Sell one house for $500,000, collect your 6 percent fee, and pocket a cool 30 grand. You don’t need to sell very many houses before you are sitting on a beach in a swimsuit drinking mai tais with little umbrellas at 3:30 in the afternoon.

Now, the only ones sitting on a beach in California are the unemployed. With house prices down 40 percent in cities like Los Angeles—and with one of the highest jobless rates in the nation, record food stamp usage, and a budget that can’t be balanced even with massive federal handouts—California is dreaming of the good old days.

Even the illegal immigrants are leaving—that’s how bad it is.

Pay close attention, Australia. Los Angelification is coming to a city near you.

The Australian Bureau of Statistics just released its House Price Index for March, and it is shocking how much Australia resembles bubbly, pre-bust California. On average, house prices are up an astounding 20 percent in each of Australia’s capital cities compared to one year ago. Last year’s $500,000 average fixer-upper in Sydney now costs $600,000. In Melbourne the median house price jumped $116,917 to $549,980. Want to buy in Canberra? Get ready to fork over $495,000.

Property prices in Australia are going berserk. Even remote Darwin saw house prices rise 17.5 percent. The slowest growth was in Brisbane, which by most standards anywhere else in the world was a sizzling 9.1 percent.

And remember: These gains are compounded on top of last year’s average 13 percent rise.

For comparison, for the 70 years leading up to 1995, house prices only increased by 3 percent per year on average.

With prices so high, how can the average family in Australia afford to buy a home?

They can’t.

By all realistic measures, Australians cannot afford to buy homes at these prices. Yet, like sheep to a slaughter, buy them they do.

The 6th Annual Demographia International Housing Affordability Survey: 2010 ranked 272 housing markets in Australia, New Zealand, Ireland, Canada, the United Kingdom and the United States according to affordability. Of the top 20 most unaffordable markets, 12 were in Australia—including three out of the top five.

Twenty-two out of 23 major urban markets in Australia were considered “severely unaffordable,” with the remaining one considered “seriously unaffordable.” Moreover, all but one of Australia’s smaller markets were considered “severely unaffordable” too.

In Sydney and Melbourne, house prices have risen so high that it would take more than 50 percent of the average median household income to make just the mortgage payments of a median-priced home—and that doesn’t include upkeep, or taxes.

A typical house in Australia now costs 6.8 times the typical annual household earnings. Homes in Newcastle, Mandurah and Darwin cost around 7.1 times. Wollongong and Adelaide cost around 7.5 times annual household earnings. The most expensive areas are Sydney and the Sunshine Coast, where homes cost an astounding 9 times average household salaries.

Imagine spending 9 times your salary on a house. If you and your wife earn $110,000 per year and own a house in Sydney, it would be typical for you to be on the hook for a million-dollar mortgage.

Emphasizing how far out of line with salaries home prices have become is the fact that historically house prices have cost around 3 times household salaries (and for much of Australia’s history, there was only one bread earner in the household). Financial planners advise not paying more than 20 to 30 percent of your salary on all housing-related costs—around half of what people are paying now.

The housing frenzy in Australia has become so intense, and homes are so unaffordable, that banks are now promoting loans in which borrowers never pay off the principle. Borrowers make payments, but will never—as in never, ever—pay back the borrowed money.

ing Direct, Australia’s fifth-largest lender, is marketing these loans with the idea of creating a “mortgage partner for life.”

In reality, unless house prices keep going up ad infinitum, these borrowers will be debt slaves for life.

It is “economic idiocy at its finest,” says economic analyst Mike Shedlock. “[H]ome prices do not perpetually go up.”

Politicians are making the housing bubble worse too. Giving thousands of dollars to first-home buyers and reducing stamp-duty costs only encourages people who cannot afford a home to go into debt to purchase one. This artificial increase in demand has pushed prices even higher.

According to Shedlock, “Australia’s enormous housing bubble … exceeds the height of the bubble that long ago burst in the U.S.”

So why do people continue purchasing homes, when they are so obviously overvalued and unaffordable?

Greed.

It is all about the “greater fool,” says Shedlock. Just like the stock market, people are buying houses now because they think they will be able to sell them for more later—hopefully a lot more. It is a gamble, but one that many people are making.

During manias, “[t]here is a pervasive sense that it is ‘time to get on the train before it leaves the station’ and the exceptionally profitable opportunities disappear,” notes Charles P. Kindleberger in the classic book Manias, Panics, and Crashes: A history of financial crisis. “An increasingly large share of the purchases of these assets is undertaken in anticipation of short-term capital gains, and an exceptionally large share of these purchases is financed with credit.”

Sound like Australia today?

“During these euphoric periods an increasing number of investors seek short-term capital gains from the increases in the prices of real estate and of stocks rather than from the investment income based on the productive use of these assets,” continues Kindleberger.

“Then an event … occurs ….”

As Mike Shedlock says, “the pool of greater fools runs out.” There is no one left willing to pay an even higher price in the speculation that prices will keep rising.

What happens next?

Once the bubble pops, “assets prices will decline immediately … there is no plateau, no ‘middle ground,’” writes Kindleberger. “The rush to sell these assets before prices decline further becomes self-fulfilling and so precipitous that it resembles a panic.”

Bankruptcies surge, economic activity slows, and unemployment increases, forcing even those who want to hold on to their investments to sell. The wave builds upon itself until it slams home with devastating economic consequences.

The next thing you know, you look a lot like California: a landscape of broken banks, tent cities, rows of vacant homes and people living in their cars.

Australia’s housing market has all the hallmarks of a bubble. The only question is, how long can it last?