Is housing a better investment than equities?

As you can imagine articles on long-term real interest-rates attract me perhaps like a moth to a flame. Thank you to FT Alphaville for drawing my attention to an NBER paper called The Rate of Return on Everything,but not for the reason they wrote about as you see on the day we get UK Retail Sales data we get a long-term analysis of one of its drivers. This is of course house prices and let us take a look at what their research from 16 countries tells us.

Notably, housing wealth is on average roughly one half of national wealth in a typical economy, and can fluctuate significantly over time (Piketty, 2014). But there is no previous rate of return database which contains any information on housing returns. Here we build on prior work on housing prices (Knoll, Schularick, and Steger, 2016) and new data on rents (Knoll, 2016) to offer an augmented database which can track returns on this important component of national wealth.

They look at a wide range of countries and end up telling us this.

Over the long run of nearly 150 years, we find that advanced economy risky assets have performed strongly. The average total real rate of return is approximately 7% per year for equities and 8% for housing. The average total real rate of return for safe assets has been much lower, 2.5% for bonds and 1% for bills.

If you look at the bit below there may well be food for thought as to why what we might call the bible of equity investment seems to have overlooked this and the emphasis is mine.

These average rates of return are strikingly consistent over different subsamples, and they hold true whether or not one calculates these averages using GDP-weighted portfolios. Housing returns exceed or match equity returns, but with considerably lower volatility—a challenge to the conventional wisdom of investing in equities for the long-run.

Higher returns and safer? That seems to be something of a win-win double to me. Here is more detail from the research paper.

Although returns on housing and equities are similar, the volatility of housing returns is substantially lower, as Table 3 shows. Returns on the two asset classes are in the same ballpark (7.9% for housing and 7.0% for equities), but the standard deviation of housing returns is substantially smaller than that of equities (10% for housing versus 22% for equities). Predictably, with thinner tails, the compounded return (using the geometric average) is vastly better for housing than for equities—7.5% for housing versus 4.7% for equities. This finding appears to contradict one of the basic assumptions of modern valuation models: higher risks should come with higher rewards.

Also if you think that inflation is on the horizon you should switch from equities to housing.

The top-right panel of Figure 6 shows that equity co-moved negatively with inflation in the 1970s, while housing provided a more robust hedge against rising consumer prices. In fact, apart from the interwar period when the world was gripped by a general deflationary bias, equity returns have co-moved negatively with inflation in almost all eras.

A (Space) Oddity

Let me start with something you might confidently expect. We only get figures for five countries where an analysis of investable assets was done at the end of 2015 but guess who led the list? Yes the UK at 27.5% followed by France ( 23.2%), Germany ( 22.2%) the US ( 13.3%) and then Japan ( 10.9%).

I have written before that the French and UK economies are nearer to each other than the conventional view. Also it would be interesting to see Japan at the end of the 1980s as its surge ended and the lost decades began wouldn’t it? Indeed if we are to coin a phrase “Turning Japanese” then this paper saying housing is a great investment could be at something of a peak as we remind ourselves that it is the future we are interested as looking at the past can hinder as well as help.

The oddity is that in pure returns the UK is one of the countries where equities have out performed housing returns. If we look at since 1950 the returns are 9.02% per year and 7.21% respectively. Whereas Norway and France see housing returns some 4% per annum higher than equities. So the cunning plan was to invest in French housing? Maybe but care is needed as one of the factors here is low equity returns in France.

Adjusted Returns

There is better news for UK housing bulls as our researchers try to adjust returns for the risks involved.

However, although aggregate returns on equities exceed aggregate returns on housing for certain countries and time periods, equities do not outperform housing in simple risk-adjusted terms……… Housing provides a higher return per unit of risk in each of the 16 countries in our sample, and almost double that of equities.

Fixed Exchange Rates

We get a sign of the danger of any correlation style analysis from this below as you see this.

Interestingly, the period of high risk premiums coincided with a remarkably low-frequency of systemic banking crises. In fact, not a single such crisis occurred in our advanced-economy sample between 1946 and 1973.

You see those dates leapt of the page at me as being pretty much the period of fixed(ish) exchange-rates of the Bretton Woods period.


There is a whole litany of issues here. Whilst we can look back at real interest-rates it is not far off impossible to say what they are going forwards. After all forecasts of inflation as so often wrong especially the official ones. Even worse the advent of low yields has driven investors into index-linked Gilts in the UK as they do offer more income than their conventional peers and thus they now do not really represent what they say on the tin. Added to this we now know that there is no such thing as a safe asset more a range of risks for all assets. We do however know that the risk is invariably higher around the time there are public proclamations of safety.

Moving onto the conclusion that housing is a better investment than equities then there are plenty of caveats around the data and the assumptions used. What may surprise some is the fact that equities did not win clearly as after all we are told this so often. If your grandmother told you to buy property then it seems she was onto something! As to my home country the UK it seems that the Chinese think the prospects for property are bright. From Simon Ting.

From 2017-5-11 90 days, Chinese buyers (incl HK) spent 3.6 bln GBP in London real estate.
Anyway, Chinese is the #1 London property buyer.

Perhaps the Bitcoin ( US $4456 as I type this) London property spread looks good. Oh and as one of the few people who is on the Imputed Rent trail I noted this in the NBER paper.

Measured as a ratio to GDP, rental income has been growing, as Rognlie (2015) argues.

Meanwhile as in a way appropriately INXS remind us here is the view of equity investors on this.

Mystify me
Mystify me

UK Retail Sales

There is a link between UK house prices and retail sales as we note that both have slowed this year.

The quantity bought increased by 1.3% compared with July 2016; the 51st consecutive year-on-year increase in retail sales since April 2013.





15 thoughts on “Is housing a better investment than equities?

  1. better?

    it was , so long as you knew when to get out…… as always

    currently I think you’re still better off buying and renting with yer millions pounds ( in London for sure) than trying to live off an income in investments ( bonds – yuk! )

    might not be for much longer …..


    • Hi Forbin

      Your reply has made me think about one other thing. That is that housing can put a roof over your head, or as I live in a ground floor flat 4 floors above your head! I could even charge myself imputed rent. Oh hang on…….

    • I have a friend who took a redundancy 10 years ago, invested his lump sum (not in property) and has made the same or income over any 3 year period as he made when working on a inflation (RPI) adjusted basis so he has unwittingly disproved your theory.

  2. As you have said it’s difficult to disentangle all the strands when it comes to comparing asset classes.

    It seems to me that one significant factor over time are the issues of tax and regulation; any comparison of returns is false in a way because of the differing assumptions that usually apply to the taxing of property and that of income because, at the end of the day you could say that property is a stock whereas equities are based on business flows. These assumptions can last in tax codes for many years, even 150 years!

    The volatility of returns is also not surprising; property is a slow moving asset class whose price must be related at some basic level to variations in population and is at least partially a rental return whereas equity returns are based on income flows which are subject to the vagaries of the much shorter term business cycle.

    Returns must also be affected by wars and economic depressions but there is no way to back cast this in any calculations.

    What does all this mean at the end of the day? I’m inclined to agree with you – very little.

    • Agreed, tax is a major factor in such investments. The personal net gain is likely very different.

      You can take the buy-sell gain, divide by time and totally miss this point.
      Away from the rarefied 10%, you have property stamp duty loadings up front (I realise that the UK is ‘cheap’ compared to some of our continental cousins) and CGT / tax at the back – they both hit in a single year, not over the 5, 10 years of ownership. With shares / bonds etc granularity you can at least sell a %age of them every year to maximise annual CGT / personal allowances.

      I wonder if anyone knows the number of individuals owning say <6 BtLs as opposed to the serious players, who will have assorted ways of sidestepping such unwanted tax contributions?

  3. Returns on property vary enormously by region, town and even street. The overall figures lump this all together hiding poor returns in the north east amongst stellar returns in London. If you could bundle multiple house purchases and buy through a fund then your investment may return the percentage mentioned however buying a single property ( or even one or two) then the risk and reward is much more focused and unlikely to follow the national historical trend.

    • London property prices in many postcodes trebled between 2008 and 2016.

      There are places in the North East/Wales and other more peripheral markets where hosuing is down 30% plus on 2007 ….even now.

  4. Being able to leverage on property makes it the big winner imho, though if it wasn’t for BOE/LIBLABCONs socialism by bailing out these over leveraged financial illiterates from 2007 it’d have been the worst investment.

    Banks stopped lending to shoe shine boys to buy shares long ago and for a very good reason … one day they’ll learn dishing out easy money 21st century shoe shine boys to buy property using someone elses wages to fund the repayments is a bad idea, as they almost found out in 2008.

    • House prices are a direct function of credit availability.If banks are willing to lend 7 times salary,many will borrow 7 times salary.

      This is what happens when you have implicit back stops of over leveraged financial insitutions

      • With BTL you don’t need a salary of your own, just someone elses. At one time it was a case of a relatively small deposit and an ability to sign a form. Hence why its been so profitable in a booming then bailed out then booming again market.

        It’s insane to think banks continue to lend to individuals with very little income other than the rent they get hundreds of thousands or millions of pounds.

        • If you’re a new starter btl with no previous business experience then you most certainly DO need your own salary because it is that which the bank will use to determine how much to lend to you.

          If you have at least 5 years btl experience and accounts to supply then you no longer require a salary and the bank will lend solely on your profits because basically your btl profits ARE your salary as by this time you have a proven track record of either success or failure and failure will result in a polite “no”.

  5. Anything that includes house prices 2008-2017 should come with a fiscal deficit/insolvent bank health warning.

    Just saying.

    On equities,you also have to consider that many shares in the 100 in 2000 aren’t in there any more.

    • Hi Dutch

      On the equity issue the one you mention about the index is often ignored. Matching in theory is easier than in practice and there are fees and costs. I remember years ago going to see a company that claimed to be able to match the FTSE 100 with only 13 shares ( to cut costs). There is the issue of not being able to buy new shares if they are surging and on the other side when a stock gets hammered how much of it happens before it falls out of the index. Or if we switch to Japan around 40 of the shares in the Nikkei 225 rarely traded at all which made index tracking more problematic.

      As we discuss so often theory diverges from the practical.

  6. There are a couple of issues here around the definition of “risk”, it’s measurement.and the enormous time span involved.

    The paper informs us that when measured over 150 years housing provides a slightly superior return, yet the last 150 years has seen the invention of the motor car, air travel and 2 world wars to name just a few enormous events that cannot be repeated. As such no real meaningful information may be gleaned.

    I’d say a study since 1945 would be more relevant to the present day and towards forecasting. You may argue that the future holds as many and maybe more revolutionary changes that affect mankind (look at the advent of computers and smartphones etc) and so is comparable to the past. The problem with that notion is we just don’ know, there may be very few new inventions or a lot more compared to the past which again renders the report useless in terms of relevancy to the here, now and the future.

    The report states that equities outperform housing in the U but on a risk adjusted basis housing wins.

    The problem here is the definition of risk and it’s measurement. When equities start falling then because it’s a very liquid market and most investors can afford to take losses investors simply sell fast and pull out. The market can easily be measured on a daily basis via the index. When house prices begin falling you are dealing with a very illiquid market where most people borrow to purchase their “asset”. This being the case most market participants can’t afford to sell and be left with negative equity so they hang on hoping the market will recover which it usually does but the wait can stretch out to 7 – 8 years at times. This results in a very inefficient price discovery mechanism as volumes collapse whereas the price discovery mechanism of equities is very efficient due to it’s liquidity and the ability of market participants to realise losses. It may well be that if you decide to stay invested in equities (particularly income and dividend paying equities) over any 7 – 8 year period your return would be greater than the the housing market and you would have noticed the same amount of volatility as the housing market because you decided to stay invested as most home owners are forced to in times of volatility. I such a long term housing type approach to “buy and hold” investing in equities it may be that even on a risk adjusted basis equities are better.

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