Stocks or real estate?
The paper The Rate of Return on Everything examines historical prices of stocks and real estate in 16 developed countries (e.g. France, the US, the UK, Japan, Finland) from 1870 to 2015. The authors also estimate historical rent-to-price ratios of real estate and calculate returns on real estate investments.
Their main finding is that the yearly return on real estate (6.62%) is significantly higher than that of stocks (4.66%). These are real net returns, which account for real estate running costs (such as maintenance and insurance), though they do not account for taxes.
Their findings seem to be quite robust to using different estimation methods, different country weights or different time periods. Of the 16 countries studied, only two—the United States and Australia—show slightly higher stock returns than real estate:
| Stock | Real estate | |
|---|---|---|
| US | 6.66% | 5.80% |
| Australia | 6.37% | 5.90% |
Putting average returns aside, real estate has other advantages: the ability to use leverage through mortgages and lower volatility both in time and across countries. For example, the worst-performing country for stocks—Portugal—had a negative real return of -0.67%, whereas the worst-performing country for real estate—Italy—still showed a positive return of 4.39%.
The main limitation of the study is its reliance on estimates. However, given the sizable difference in returns—nearly 2 percentage points per year—some minor inaccuracies in the estimates are unlikely to make a difference.
Conclusion
This paper challenges the popular belief that stocks outperform real estate. Based on long-term data from 16 developed countries, it seems that real estate has higher and safer returns. The strong results of US stocks appear to be an exception - not a rule.
