Tamara Jenkins has been outbid about 20 times in her nine-month quest to buy an apartment in Melbourne’s inner suburbs.

“I started with such enthusiasm,” the 36-year-old public relations director said in an interview. “I’m so frustrated with the process. I’m ready to buy, but I keep missing out.”

The source of her frustration — a shortage of 200,000 dwellings — is helping fuel Australian home prices, which are 82% higher than in the United States, and disproving investors such as Jeremy Grantham, who says they will fall 42% as interest rates rise in one of the world’s priciest home markets.

“It will take years to turn the shortage around,” said Matthew Bell, an economist at Australian Property Monitors, a researcher cited by the central bank. “When it comes down to it, that’s fundamentally what’s going to drive the market.”

Australia’s median home price was 6.8 times gross yearly income last year, compared with 5.1 times in the United Kingdom and 2.9 times in the United States, according to the annual Demographia International Housing Affordability Survey. The nation of 22 million people has six of the 10 most unaffordable cities among the United States, the U.K., Canada, Ireland, New Zealand and Australia, the survey showed.

The median home in Australian cities cost A$468,000 (US$395,000) in May, figures from real estate monitoring company RP Data show. The median price of a new home sold in the United States in 2009 was US$216,700, according to government data.

Stategovernmentsonthedriest inhabited continent — 70% of Australia is arid or semi-arid –aim to keep more than half of new developments within the existing borders of the biggest capital cities, says the National Housing Supply Council’s State of Supply 2010 report.

Home prices in Australia surged 20% in the year to March in an economy with a 5.2% jobless rate, about half U.S. and European levels. Melbourne and Sydney, the most populous cities, led the way with jumps of 28% and 21%, respectively, statistics bureau data show.

Reserve Bank of Australia governor Glenn Stevens has cited house price gains among reasons for his six interest-rate increases since early October, to 4.5%, adding about A$3,600 a year in repayments to the average A$300,000 home loan. Interest rates will be 0.75 percentage point higher in a year’s time, says a survey of economists by Bloomberg News.

Mr. Grantham, chief investment strategist at Bostonbased Grantham Mayo Van Otterloo & Co., says higher rates may pop Australia’s housing bubble. The nation’s home prices need to fall 42% to “return to trend,” he said, without giving a timeframe or by how much interest rates would have to rise before that happens.

“It’s like a time bomb, just waiting for the rates to become increasingly impossible to support,” he said at a media briefing in Sydney on June 15. “All bubbles break, they’re the only thing that matter. They break because we live in a mean-reverting world. Things go back to normal, even Australian housing prices.”

The credit crisis that triggered a tumble in the U.S. and U.K. housing markets made Australian banks tighten requirements for home loans and curb financing for new developments. That has prevented mortgage defaults and overconstruction, the two traits common to housing collapses, said Alan Oster, chief economist at National Australia Bank Ltd.

“There are a couple of things that are really important in a structural sense: the growth of population and whether you’ve overbuilt or underbuilt relative to that population,” Mr. Oster said. “The answer there is that we’ve significantly underbuilt.”

Over the next 10 years, Australia needs to build about 420,000 homes more than were built over the past decade to meet demand, said Harley Dale, chief economist at the Canberra-based Housing Industry Association.

Housing starts will fall 3% in 2011 from the 165,940 forecast this year, the HIA said on June 28, because of a lack of land for development in the nation’s cities, falling demand from first-home buyers and rising borrowing costs.