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"The price people are prepared to pay" is useful to give you an idea of the price NOW. But may not be so accurate in the long term because affordability can change fairly quickly (as we have seen overseas). Using current prices and affordability (ie what people were paying) in the USA has...

I guess it depends on the purchasers ability to conduct proper DD. This includes understanding how to value, and an appreciation of risk.

Thats right, both recommendations can be incorrect. Its the cost of being wrong on either of these that todays buyer needs to weigh up. If you don't buy, you risk prices going up even more, so have to live at home with parents or rent for longer, but you'd have some decent savings if/when you...

The thing is, nobody really knows if or when the market will turn. Most of Australia seems overvalued, as you mention, due to the initiatives/incentives that have helped prop it up. If you can rent for significantly less than the interest on a mortgage, it wouldn't hurt to do just that...