Australia is in the midst of one of the greatest property booms in history. Eventually, it may be spoken of in the same breath as the South Sea Adventure and Tulip Mania of centuries past.

How so many people could be blind to the bubble—especially after so many other housing bubbles spectacularly exploded in Spain, Ireland, America and elsewhere—will be an enigma that will puzzle historians.

Last year, when the Trumpet wrote about Australia’s looming housing collapse, it invoked mirth and merriment from enthused Aussie investors. Take Dave, who advised: “You keep writing whilst I go buy some property,” or Trumpet reader Stewart, who said the idea of property prices falling was “bordering on the ridiculous.”

“[O]ne big point I’d like to make is that Australia is not America,” said Dave. “[O]ur mindsets and philosophies differ greatly and common sense usually prevails and intervenes, hence why nothing suggested by the article will occur—I guarantee it.”

But are Australians really that different than Americans? Are they not subject to the same pulls: The desire for a bigger bank account, a shinier car, a night out on the town? Do Australians not gaze at their smiley-faced neighbors and long for a bigger barbecue? Are they immune to the “keeping up with the Joneses” syndrome?

“I would put my own money on the line” that Australians are different, said Dave.

And so he did. “I am a first home buyer (built one) and received the $21,000 boost grant from the government,” he related. The grant is “even more if you built in the country.” I could never have done it without the government money because my “income was too low,” he said.

And so far it is working out great, he says. I “already have $100k plus equity in past 18 months!”

“Now I will be buying an investment property shortly,” which because he is an investor will be, of course, an interest-only loan, he said.

Yet the fact is that Dave, Stewart, and thousands of other Australians will soon be wishing they had never ever met a realtor.

According to the Economist,Australian house pricesare the most overvalued in the world.

To give you an idea of just how big the bubble is, “entry-level property” typically costs us$400,000 to $500,000. That’s a starter. Or, in Melbourne, a “fixer-upper” with termites.

In Sydney, the average house costsaus$600,000. But the average salary in Australia is only $65,000. That means that homes sell for more than nine times yearly salaries. Typically financial planners say you should spend no more than two to three times your household salary on a house. Even if both spouses worked, it means Australians are spending 4½ times household salary.

Compared to what you would pay to rent a similar house, the Economist says prices are overvalued by 56 percent—making them even more expensive than property in Hong Kong. And Hong Kong is a banking center with geographical constraints (a true land shortage). Australia, in contrast, is one of the least densely populated countries in the world.

Since 1986, Australian house prices have increased a whopping 600 percent, according to prominent house price critic Steve Keen. During that same time period to its peak in 2006, U.S. national house prices rose 350 percent. We know what happened next.

It is a debt-fueled binge of historic proportions,says Keen, who is an associate professor at the University of Western Sydney. “We’ve had a debt-driven housing bubble, just as has the U.S.”

Over the past 40 years, the ratio of how much debt is owed on a dwelling compared to what it can be sold for has increased 400 percent. And the ratio of how much debt borrowers are taking on compared to their disposable income has increased 800 percent.

These are two numbers that should shock people, says Keen. It’s a “Ponzi scheme.”

And the government has made things worse. Government grants encourage people who cannot afford a house to enter the market. But giving such grants to people who have not proven that they can financially handle a house (by saving up a down payment) has consequences. It artificially increases demand, making prices more expensive for all people—the exact opposite of what well-intentioned government bureaucrats are trying to accomplish.

It is a simple equation: Massive debt binge plus government meddling equals an “Australian housing bubble [that] is categorically larger than the U.S.,” warns Keen. Or as famed investor Jeremy Grantham calls it, a “time bomb.”

Ponzi schemes and bubbles of every kind always eventually collapse. They are dependent on an ever increasing supply of buyers to pay more money for the next house. But the supply of greater and greater suckers eventually runs out. Eventually prices get so high that even the biggest patsy is priced out of the market.

The result is always the same: Greed turns to panic, and dramatic collapse ensues. The herd stampedes in the other direction. Homes become ball and chains. Mortgages are debtors’ prisons. People just want out.

All of a sudden, it is cool to rent.

And when this Down Under Ponzi scheme does collapse, it will be catastrophically expensive. By the time that $450,000 “starter home” is finally paid off in 30 years, it will have cost over $1 million. If house prices fall by just 25 percent (they have fallen by 40 percent in California and elsewhere), many people will spend the rest of their lives paying hundreds of thousands of dollars on property that is worth only a fraction of what was paid for it. “It is only a matter of time,” says Keen.

A bank crisis will be likely as well. When the foreclosures mount, Australia’s prized banks, which today appear to be money trees, will become raging money forest fires. Australia’s big banks are borrowing money just as furiously as Australian home buyers. But, more dangerously, much of their money comes from foreign sources. When it all pops, the foreign cash will dry up, yet the debts will remain. Either taxpayers will bail out the banks, or foreigners will foreclose.

And the pin might have just pricked the bubble.

In January, Australian city house prices dropped 1.6 percent. It was the second month in three that prices fell, and it was the largest decline since 2005. Prices in Brisbane have plummeted 2.3 percent since November. Canberra is down 3.8 percent; Sydney is lower by 1.4 percent. In Adelaide and Perth, house costs retreated 1.3 and 2.6 percent respectively. Of the major centers, only Hobart squeaked out a gain.

“We have had no value growth at all since May 2010 across the combined capitals and since January 2010 in the regions outside the capital cities,” said RP Data’s research director Tim Lawless.

Meanwhile, affordability at the end of last year was 10 percent worse than in 2009, according to the Housing Industry Association.

“There has simply never been an asset bubble that has burst and gone sideways,” says Keen. “Never.”

Here is the point. Australians need to use this period of time to drastically reduce their standard of living. As Keen warns: The cliff is approaching. There will be no soft landing.

If you have a second house, consider selling. If you have a bigger house than you need, consider downsizing. If you have a job in the construction industry or housing-related fields, consider selling your house, taking what profit you may have and renting. If you stay with your house, and property values fall like they have in America (and Ireland, Spain, Greece, Iceland), realize, you may soon be stuck paying a $600,000 mortgage on a house that can only be sold for $300,000.

Use what time is left of the boom to get out of debt and ramp up savings. Most people do not have any emergency savings, let alone the six months of expenses that experts recommend. Plus, many homeowners today rely on two incomes to keep up the mortgage. If even one earner loses his or her job, they will lose their house.

Australia is a nation binged out on debt. It is a country at the height of good times. Now the debt bubble may be about to explode. And when it does, it will ultimately impoverish a nation.

Are we right about this? You are staking a lot on the answer to that question.