There is nothing logical when it comes to house prices !!

What is the key difference between the Sydney property market and the stock market ? If anything, the Sydney property market is inherently more restrictive. The transaction costs are much higher. The holding period is a lot longer. The opportunity to make a monumental mistake is arguably higher. The only upside to owning a property is there is no capital gain tax applicable. 

BUT I suspect the key problem with the property market is how does a seller set the price ?

Even though, we are talking about a high value transaction here, the whole price setting process seems like a magical black box to me. This is how it works. The real estate agent looks up the database of comparable sales in the area. He considers factors like land size, condition of the house, the need of the seller, how many rooms etc etc...... This is a perfectly subjective process. The price is to a large extent set by the price a previous buyer was willing to pay for a similar property. 

Here is a real life example. Take Wollstonecraft for example,  it is becoming quite a frustrating suburb for me personally. What is noticeable nowadays is there are plenty of houses over $2M (even over $3M) in the suburb.  It all started when a house (4/5 bedrooms and big land) on Cable Street got sold for $2.8M. I was at the auction that day and what stood out was the agent played the 2 bidders against each other very well. I would go as far as to call the auction a "war" between the 2 bidders. From that point onwards, I notice that prices for the bigger houses easily jump over $2M. Take one current listing for example, the asking price is now $2.35M after a failed auction. Before the auction, the agent was suggesting $1.9-2M. What is also discouraging is the house next door was sold for $1.65M around 2 years ago. Close to 50% price appreciation in less than 2 years is quite impressive I must say.

Another example is Mosman. Why is it that prices go through the roof whenever it is close to the beach or has some sort of a view ? I have no problem with that, after all it is supply and demand and people do like the life style of living close to a beach. What I don't understand is why is a view overlooking Middle Harbour also push prices through the roof ? There is only 1 Sydney Opera House and I Harbour Bridge in the world but plenty of ocean view eveywhere.

My point is valuing property is hardly a precise science. There are too many emotional factors involved. Conversely, based on what we know, there are hardly any arguments to suggest that property prices are currently under valued.