Billionaire investor Kerr Neilson says shares are at least as good a bet as the property market, and it would take a “leap of faith” for house prices to beat inflation over the next decade.

The founder of Platinum Asset Management, Mr Neilson ranked at No.10 on the 2014 BRW Rich 200 list with a fortune of $3.35 billion.

Timing and the “cherry picking” of historical prices helped keep property in favour with investors, he said.

But “when conditions change, a lot of the assumptions are found wanting,” he warned in a letter to clients of his funds.

Mr Neilson outlined four factors he argued undermine the case for housing as an investment: 

• property returns were often exaggerated by inflation; 
• the cost of taxes, rates and maintenance can absorb half of one’s rental yield; 
• long-term value is determined by affordability; 
• and “to be optimistic about residential property prices rising in general much faster than inflation is a supreme act of faith”.

“Today, houses cost over four times the average household’s yearly disposable income. At the beginning of the 1990s, this ratio was only about three times household incomes... this looks like the peak,” Mr Neilson said.

“To believe that home prices in the next 10 years will meaningfully outpace the consumer price index (CPI), as they have in the past, would require a remarkable set of circumstances,” he said - low interest rates, people's willingness to borrow more, greater work force participation, and wage growth that exceeds inflation.

House prices have become an increasingly divisive issue as prices escalate. The Reserve Bank of Australia waded into the debate earlier this month, finding that people are probably better off renting unless house prices can match historical average returns recorded since 1955. But the central bank dismissed notions of a housing bubble.

Moody’s Analytics has warned of “worrying trends” when interest rates rise, because rents and incomes have failed to keep pace with surging property prices and under normal interest rates, national house prices appear overvalued.

A report from Credit Suisse last week similarly predicted it would only take 100 basis points (1 percentage point) of interest rate rises in the Australian economy to bring the part of household incomes that is used to service debt back to highs seen during the global financial crisis.

Even though interest rates are now at record lows, the proportion of household income going to interest payments has risen to 9 per cent from 6 per cent before the crisis.

This is critical, accprding to Mr Neilson, because the key driver of residential property historically has been “the willingness of Australians to progressively use much more debt, assisted by progressive falls in interest rates”.

While share prices are volatile, the veteran investor argued that house prices experienced volatility too but shares offered more liquidity and better tax advantages.

On Platinum’s analysis, Australian residential property has returned around 10 per cent annually over the past 20 years and 6.1 per cent annually over the last 10 years. Global and domestic stocks have returned 8 per cent to 9 per cent annually over 10 and 20 years, respectively.