With rental yields on Melbourne houses now hitting a record low beneath 3 per cent, it is no exaggeration to suggest that investors would be better off with a term deposit.

CoreLogic RP Data figures for September show that Melbourne houses purchased now are currently returning a gross rental yield of just 2.9 per cent.

That is the lowest on their records which go back to 1996.

Keep in mind that this is a gross yield, and agent's fees, maintenance, repairs, rates and numerous other expenses will easily cost thousands of dollars per year in addition, further lowering the real return.

However, for ease of comparison, this analysis will simply use the gross yield and magic away those pesky costs.

Compare that to a term deposit, where the rates being offered for a five-year investment range from 2.65 to 3.6 per cent; 3.1 per cent is middle ground, and a pretty typical rate being offered.

These term deposits are with authorised deposit taking institutions, which means that they are Federal Government insured up to the cap of $250,000.

The cap is per person, per institution, so you can get around it by spreading your deposits across several banks.

That makes these term deposits about as risk free an investment as you can get - you only lose if the Government defaults on its guarantee commitment, at which point we would be looking at serious riots in the streets.

Compare that risk free investment with its guaranteed return to buying a house, where you face the risks that you may not find a tenant straight away, the tenant may severely damage your property or the property has lost value by the time you want to sell.

You would think that you would demand a higher return for the risky house than the term deposit which is safe as houses, so to speak.

But when you crunch the numbers, if you had the $635,000 to buy a median priced house in Melbourne outright, you would be better off putting it in the bank.

At current rental growth below 1 per cent per annum in Melbourne, you would be more than $10,000 better off with a 3.1 per cent per annum term deposit after five years (interest compounded annually).

If you make the generous assumption that rental growth is seriously going to outpace income growth and jump back to 3 per cent per annum, then you would still be nearly $7,000 better off with the term deposit.

The reason for this is two-fold.

The first is that the interest you are getting on the term deposit, even at a record low cash rate, is still better than rental growth at the moment.

The second is that the earnings in the term deposit compound if you leave the money in the bank, while the earnings from your house do not, unless you reinvest them somewhere else.

The main point of this simple analysis is that the only logical reason you would be investing in a house in Melbourne at current prices and rents is for anticipated capital gains, and Sydney is not much different.

All the tax advantages associated with housing are also premised on capital gains, so negative gearing and the capital gains tax discount are only reasons to invest if you think the property's price will go up.

When you have a market where the only reason people invest in an asset is in the anticipation of a capital gain, you have a bubble. Simple.