Nonetheless we can use the old theory to gain insights. I tried to suggest on Twitter a way of looking at the interaction of supply and demand which better fits the facts than the textbook model. I made a mess of it so here is an explanation in more than 140 characters.
My target here is the belief that house prices are rising because demand outstrips supply.
Firstly, the textbook story looks like figure 1.
To deal with continually rising prices we need to assume that the demand curve is moving rightward faster than the supply curve. This is where the second problem comes in: house-building is stronger when prices are rising. During the last boom, new housing units were added faster than new household formation. Increasing supply, in this model, means shifting the supply curve to the right, which should lower prices; the opposite happened.
A more realistic model would recognise that the supply curve is nearly vertical, at least in the short run. However for an increase in supply to coincide with higher prices we need an upward sloping demand curve. That gives a model like figure 2.
To understand why, we need to find a reason why rising prices attract buyers into the market. perhaps people feel the need to buy now before prices rise further. Perhaps they believe that rising prices are making house owners richer and they want to join in. A combination of anxiety at missing the chance to own and the desire to own an appreciating asset are enough. Fear and greed are powerful incentives.
The gap between supply and demand can explain high prices, but the shape of the demand curve explains the dynamic of increasing prices.