You can't be certain about many things these days - death and taxes of course - and you could probably add to that the prospect of getting a flurry of furious replies from enraged property investors if you write an article impugning the investment merit of residential property. Gareth Morgan did just that the other day and when I last looked there had been 178 comments on the Herald website which is surely some sort of record.

A good majority of these are not happy with some respondents blaming a mistrust of the stockmarket as leaving housing as one of the least bad options. But what the heck, I thought I would have a go anyway.

Last month an interesting new book was published in the UK, written by Neil Monnery. Mr Monnery is a graduate of both Oxford and Harvard Universities and worked for one of the world's most prestigious management consultants, The Boston Consulting Group.

The book is entitled "Safe as Houses" but the author's conclusion is that residential investment is anything but safe. Mr Monnery is clearly worried about the housing market and he takes a close look at what he considers are three of the major misconceptions about housing investment. These misconceptions are that:


• House prices go up over the medium and long term

• Dips are an opportunity to get into the market because they are relatively brief

• Prices grow well ahead of the rate of inflation making houses a very good investment.

Mr Monnery argues that these beliefs are widely held because they reflect the experience of the housing market that most of us have had over our lifetimes. He has spent a great deal of effort getting very long term historical data on residential property prices in the US, the UK, various European countries and Australia including a 400 year history of house prices in Holland.

First up however he looks at the popular phrase "safe as houses". Mr Monnery says that "as safe as houses" entered the lexicon in the late 1860s at about the time that shares in railway companies crashed in the UK. Whilst it is now held to mean that owning property is attractive other people argue that the original saying actually referred to physical safety and was derived from a family of phrases that started in the 1600s with such well known sayings like "as safe as a mouse in a mill" then moved on to "is safe as a crow in a gutter" before finally reaching "as safe as houses".

Mr Monnery looks at the performance of various housing markets to debunk the three misconceptions. We only have space for one so we will focus on the long term history of the US residential property market.

Mr M. reckons that the current love affair with houses is due to the fact that most people's experience with the asset class is confined to the last 30 years or so, a time when house prices went up at a rate which was far greater than the long term average.

Looking at a graph of US real house prices above we can see that in the period 1995 to around 2006 US house prices rose in real terms by about 70 per cent. However this period of irrational exuberance was short lived and since peaking in 2006 US house prices have fallen by about 40 per cent in real terms. Clearly house prices do fall in value - a 40 per cent drop in four years is a big deal. What's more if we take another look at the graph we can see than from 1890 to 2000 house prices hardly rose in real terms. In other words house prices matched inflation - there was no growth in real terms.

If that's not bad enough Mr Monnery also looks at the recent collapse in prices in Japan and Ireland where house prices have been acting more like what you would expect from a leveraged share fund.

Since their peak in 1990 Japanese house prices have fallen, again in real terms, by almost 50 per cent. Ireland once had a reputation of being the Celtic tiger but according to Mr Monnery in the 1990s the Irish got sick of making money by selling things to Europe and switched to making money by selling houses to each other. The Guinness flowed but the party ended badly and so far real house prices are down by more than 50 per cent. In addition there are 300,000 or so vacant or abandoned houses, not bad for a country with a population of about 4.5 million.

It is important to note however that the house price indicies used are capital only indicies. This means they exclude rental income and the costs of owning the house, like insurance, rates etc. This is significant - recall the major faux pas by Fundsource, a subsidiary of the NZX, when they grandly declared in April 2011 that the NZ stockmarket had outperformed house prices in the long term.

But hello, they had quite unfairly used a gross index of the stockmarket - including dividends but conveniently used a capital index for NZ house prices. We showed, with the help of Infometrics, that if you actually compared apples with apples ie included income in both indicies house prices had outperformed the stockmarket over a 20 year period. (See NZ Herald article April 2011 - Property vs shares : argument far from over).

That puts the historical record to right but what of the future? NZ residential property has not corrected to the extent that some overseas markets have. Various reports have been published recently suggesting that NZ and Australian house prices are fundamentally overvalued both relative to rental levels and incomes.

The Economist Magazine reckons that NZ and Australian house prices are overvalued by 68 per cent and 48 per cent respectively on the basis of rents and 20 per cent and 28 per cent on the basis of income. On the same basis the magazine reckons that US house prices are 12 per cent undervalued on the basis of rents and 25 per cent undervalued on the basis of income.

One other less obvious way that the stockmarket may be signalling that house prices are at dangerous levels is the dividend yields on the Australian banks. Currently Australian bank shares are priced to yield double digit returns from dividends alone. When you consider that most experts reckon the long term return from the world stockmarket will only be 6-7 per cent pa then the 11 per cent dividend yield (to Australian shareholders) from Westpac for example looks highly suspicious, to put it mildly.

The "market" is clearly worried about the bad debts that would accrue from a crash in house prices and thus is factoring in the possibility of substantial cuts in dividends from Australian bank stocks. Irish bank stocks have taken a huge hit from lending on residential property and dividends are out of the question.