And on top of that there's huuuuuuuuge variance over time. You have to scale in and out of the market over a very long time to actually get the ~7%. Any one time investment is just a straight up gamble. It's only in aggregate over a long time that you get something somewhat reliable. But then the numbers aren't that impressive. I understand why people are so fond of buying bigger or second houses instead. It's a shame because it drives up the price of housing making it less available for our young. We're basically saving for our future by robbing the future of our young. It's pretty dark to be honest.
Yes, the trick with houses is that it’s the only chance most retail can get 5:1 leverage. Your brokerage will never extend that to you to invest in equities.
But without leverage, long run return of residential real estate is like 3% after costs, which is less than equities but above bonds.
At least that’s what I tell myself as I go to sleep in my apartment, a non-homeowner watching people accumulate serious paper gains in their houses ;(
Source: a paper called the real return on everything.
Leverage comes with a cost though through interest rates. It is entirely possible (and even typical) to come out with a loss even on appreciating real estate, since your house must appreciate by more than the interest on your loan. In the UK at-least you can get 1:5 leverage on equities, but you'd be looking at a 20-25% APR, instead of the 5% mortage.
The paper "the real return on everything" notably cuts off in 2010 and is talking about global averages, if you narrow it down to specific countries we can see stark differences. In the USA and UK you get 8.4% and 7.2% returns on equity, but only 6.03% and 5.36% returns on housing, a stark difference. Adding in mortage leverage adds on about a percent or so of return, thus still not bringing housing in-line with equities.
If we narrow our window to post 1980, we see in the UK returns of 9.34, 6.81 and 6.67 % for equity, housing and bonds. If we look at post 2010 in the uk, house prices have only stayed the same or decreased in real terms since then in the uk for instance, whilst equities have soared.
Good points! And the period since 2010 has been mostly up and to the right.
While the housing market as a whole may go up, the likelihood that any individual house will go up probably varies more.
How do you get that much leverage from a brokerage to invest in equities? In the US we have something called Reg T, which basically says brokerages can only lend at 2:1 against securities in most cases.
Even most leveraged ETFs will generally stop at 3X.
Source: "Since 1957, the S&P 500 has delivered an average annual return of 10.54%, but when adjusted for inflation, the real return drops to 6.68%."
https://www.investopedia.com/ask/answers/042415/what-average...
And on top of that there's huuuuuuuuge variance over time. You have to scale in and out of the market over a very long time to actually get the ~7%. Any one time investment is just a straight up gamble. It's only in aggregate over a long time that you get something somewhat reliable. But then the numbers aren't that impressive. I understand why people are so fond of buying bigger or second houses instead. It's a shame because it drives up the price of housing making it less available for our young. We're basically saving for our future by robbing the future of our young. It's pretty dark to be honest.
Yes, the trick with houses is that it’s the only chance most retail can get 5:1 leverage. Your brokerage will never extend that to you to invest in equities.
But without leverage, long run return of residential real estate is like 3% after costs, which is less than equities but above bonds.
At least that’s what I tell myself as I go to sleep in my apartment, a non-homeowner watching people accumulate serious paper gains in their houses ;(
Source: a paper called the real return on everything.
Leverage comes with a cost though through interest rates. It is entirely possible (and even typical) to come out with a loss even on appreciating real estate, since your house must appreciate by more than the interest on your loan. In the UK at-least you can get 1:5 leverage on equities, but you'd be looking at a 20-25% APR, instead of the 5% mortage.
The paper "the real return on everything" notably cuts off in 2010 and is talking about global averages, if you narrow it down to specific countries we can see stark differences. In the USA and UK you get 8.4% and 7.2% returns on equity, but only 6.03% and 5.36% returns on housing, a stark difference. Adding in mortage leverage adds on about a percent or so of return, thus still not bringing housing in-line with equities.
If we narrow our window to post 1980, we see in the UK returns of 9.34, 6.81 and 6.67 % for equity, housing and bonds. If we look at post 2010 in the uk, house prices have only stayed the same or decreased in real terms since then in the uk for instance, whilst equities have soared.
They also in the paper assume bond yields are roughly the same as mortage interest rates, which maybe was true for their data period, but hasn't been true since 2010 (https://www.housepricecrash.co.uk/forum/uploads/monthly_2022...)
Finally you can diversify equities globally, you cannot diversify your housing globally (if using leverage in a mortage).
Good points! And the period since 2010 has been mostly up and to the right.
While the housing market as a whole may go up, the likelihood that any individual house will go up probably varies more.
How do you get that much leverage from a brokerage to invest in equities? In the US we have something called Reg T, which basically says brokerages can only lend at 2:1 against securities in most cases.
Even most leveraged ETFs will generally stop at 3X.