Getting priced out is real. At one point we were considering buying but we literally could not save a downpayment fast enough to keep up with the house price increases. Homes were increasing 10% a year for like 5-6 years straight. By the time we got near what would have been a 20% downpayment we needed almost 15k more than initially planned. This is just the downpayment. Now the same houses that was 275k is selling for like 430k with no updates. So not only would we need 15k-20k more in downpayment our actual mortgage payment would be 1/3rd larger also.
With housing though, 5-6 years is short term. I wholly agree that the market can remain irrational longer than you can stay solvent - all the more reason to avoid getting into the game when the metrics don't make sense. That is one huge detriment that you may wait 15 years for prices to "revert to the mean" where stocks may go there and back in a 5th of the time. The financially wise choice in that case is simply to rent or move.
Here's a thought experiment. Let's say for the sake of argument you want the median home and have a median income. You're diligently saving your down payment, and as you say, over 5 years in increased 10% YoY. You're priced out. Who then are the 50% that are buying the 50% of houses over the median? The answer is people with below median incomes, who got above average returns from that 10% YoY from housing gains.
Great. So housing doubles in 7 years. Now, unless you already own a house and have been enjoying said gains, you are effectively "priced out". Not only that, but because housing has become such a mania, everyone who can afford one who thinks it's a good deal, (70%+ in Canada Ownership rate - Higher than the US at GFC time) Who do these people sell to? If it takes 85% of your pretax income to buy a home similarly correlated to said income, how can homes move without buying massively below your equivalent market? That's what you seen happen now on the top end where it starts. It's the least afforable on absolute terms across all income levels. So pretty much no one can rationally afford the top end, so prices have been plummeting. 40%+ in 2 years in some cases. So where do they move to? Are they literally going to pay what they just sold their 6,000 sq ft mansion for a home half the size of the one they just sold? Or would they expect to pay half? Or will they move else where? So now the tier 2 homes stagnate too. Who do they sell to? similarly someone looking for a deal. Similarly on the way down, it starts at the top then cascades down as market segments similarly can't find buyers. ANd why would they buy? You can't rent it out to cover even interest let alone maintenance or vacancy (forget profit), and you can rationally expect it to be worth less in a year from now. So prices drop... Then eventually the prices get so low, as so few people want in, that the rents they can provide make it all but irresistibly to investors, purely on a cash flow basis. People see money being made, prices go up, interest rises, more people get in, and the wheels on the bus go round and round...