One is that housing is illiquid: it's hard to sell. Even in the best times, selling takes weeks and involves the stress of dealing with lawyers. In the worst times, it can take much longer.
This doesn't just mean that property is an unsuitable investment for anyone who might need quick cash. It also means the housing market is cyclical, in the sense that property becomes even more difficult to shift at a good price in an economic downturn. This makes housing a poor store of wealth, in the sense that we sometimes need wealth most in bad economic times, but these times are just when property loses value and becomes harder to sell.
From this perspective, housing might not be a great investment. Its good returns might be only a reward for taking on cyclical risk.
We can test this hypothesis. Conventional economic theory says the return on any asset should be the product of four things:
■ The volatility of consumer spending, or: how likely are bad times? Official data show that the volatility of annual real spending growth since 1955 (when quarterly data began) has been 2.3 percentage points. But of course individuals face greater risk than this. Let's say it's three times greater.
■ The correlation between the asset and spending growth: how likely is the asset to do badly in bad times? The correlation between spending growth and house prices has been 0.69 for annual charges since 1955.
■ The volatility of the asset itself. Nationwide data shows that this has been 8.9 percentage points for annual inflation-adjusted changes in the house price index since 1955. But we don't own the index. We own individual houses. And just as individual shares are more volatile than the All-Share index, so we'd expect individual houses to be riskier than the house price index. Let's say they are twice as risky.
■ A coefficient of risk aversion, which is one if we are risk-neutral and higher the more risk-averse we are. Let's call this three.
Multiplying these four numbers together tells us that house prices should rise by 2.7 per cent per year in real terms. In fact, they've risen 2.8 per cent per year since 1955.
Annual changes in real house prices
Of course, you can quibble endlessly with these numbers: I'm ignoring the satisfaction we get from having a place of our own, but also the cost of insuring and maintaining it, as well as the cost of mortgage financing. Think of this as a Fermi estimate, a rough and ready way of generating reasonable estimates. The point is simply that housing isn't obviously a great investment, but one that pays off just well enough to compensate for its risks.
There's another problem, though: house price indices can be misleading in a downturn. This isn't just because they don't tell us what really matters to us - the price of our own individual home. It's because they can be biased.
Imagine the market is healthy and houses are changing hands as quickly as they can. And then something happens to make half of houses worth 10 per cent less - such as a recession, increased uncertainty, tax changes or pessimism about future incomes. If houses continued to trade quickly, aggregate prices would fall 5 per cent - half of 10 per cent. This is what would happen to shares. But it doesn't happen in housing. If the owners of those devalued houses maintain their price expectations at their old higher level they'll refuse to sell and simply not find a buyer. Most price indices that measure the prices at which transactions happen won't therefore change. They will, in effect, censor the bad news.
When reservation prices are sticky, price indices understate the rate of price decline and also understate price volatility. They therefore make housing look like a safer investment than it really is: they don't capture the experience of those people who can't sell their home at the price they (wrongly) think reasonable. William Goetzmann at Yale University says such indices might be "entirely spurious" as a guide to what's really happening in the market. (The same can be true in other markets where reservation prices can be sticky, such as art or classic cars.)
Bricks and mortar might feel like a safe investment simply because we are surrounded by them all day and so they feel familiar. In fact, though, this isn't the case. Property is probably riskier than it seems.