Even after the current crash they're still significantly overvalued compared to their historic prices, once you take into account inflation.
The example of Amsterdam's housing prices comes to mind as an example of the risks of undiversification. Various accounts say that here has been no appreciation in house prices since 1736[1] or that it has only doubled in 350 years [2,3].
[1] http://curiouscapitalist.blogs.time.com/2007/11/14/house_pri...
[2] http://www.finfacts.ie/irishfinancenews/article_1019261.shtm...
That said, bankers and advisors know that this is somehow assumed to be common sense, and quite often use that as an argument to get you onboard investments that are not interesting at all in most cases (apart for them :-).
It's still true - real-estate, by it's nature, is probably a good long-term investment when compared to anything else.