Firstly - if you take this argument to it's extreme, who is to set what the "lowest cost" for "basic shelter" should be? Remember there is a point at which the shelter will become more and basic the lower the cost. Conversely the higher the cost the better the shelter could be. If you take this to the extreme, we could be like an old eastern block communist state where all property is state owned and we get "allocated" our concrete box to live in for free, then all our spare money can go into "more productive" things! However, we all now where this path leads us, so therefore we also know it's far better to let the market work this stuff out for itself through land values, house prices and rents. This is the most efficient way available to find the right balance, based on what people actually want, between price and quality of "shelter".
Regardless, I don't see housing per se as a "basic function" or just "shelter". It's an argument that I see bandied about a lot. I think in a very narrow sense, housing/shelter is a basic function yes - but only in that as a society it is in our interests that we ensure everyone has shelter/housing of some sort (ie doesn't have to sleep on the streets) - even if that needs to be provided via the government through welfare/public housing etc.
However, land/home ownership is a whole different matter. The right to shelter, or rather our obligation as a society to ensure everyone has it, does not translate into a right to land/property ownership, nor does it translate into the right to have the best located, highest quality home for some arbitrary minimal cost - whether buying or privately renting!
Property is an asset class that is at the very heart of our personal living standards, lifestyle etc. The location where you live, and the quality, size, amenity etc of the home you live in are major inputs to your quality of life and chosen lifestyle. Thus by it's very nature there is going to be an element of speculation in the value of such an asset - especially as there is also the potential for cash returns through a purely market set rental income.
Part of that speculation is how much you might choose to spend on acquiring, maintaining, improving a property that you own, or invest in. The more money that moves towards property as an asset class, the better it will get, thus improving the standard of living available to us.
I don't know how well I am getting this argument across - but essentially what I am trying to say is the "market" has primarily determined the level of capital that is flowing through the property market right now (both prices and rental costs), based on what people want in terms of lifestyle and living standards and what they are prepared to pay for what is available. Anyone who thinks the amount of capital allocated is too high, or that it is unproductive, is primarily making a value judgment really, rather than an economic one IMO.
Say houses were cheaper, and I used my spare money to buy say a second hand Ferrari, or a holiday home, or maybe a chalet in Chamonoix, or even just take a world trip, is that a more or less efficient use of my capital than if I had spent it on a house? Or a house renovation? Sure I might also chose to invest in a business etc, which would be seen as being highly productive, but I could also chose right now just to live in a cheaper area, free up capital and do the same thing. Ultimately I will decide what I spend my money on (as will everyone else re their money!) - and it will be about my lifestyle and investment choices, trade offs, chosen balance etc. Government policy and regulation etc can try and put incentives and penalties in place to encourage me to spent my money one way or another, but ultimately it will (or should be!) still my personal choice! Land/house prices are no different than anything else in this respect.
Cheers,
Beej