Why real estate/property outperformance is a complete lie.

Please contact me at adamfayed@iamgltd.com if you have any questions about this article or questions in general.

 

Ask the average investor a question. Which asset has performed best in the last decades and historically.  Most would say property.  It simply isn’t true.

The only way you can beat the markets with housing is by going down the leveraged buy-to-let route but that is highly risky.  If interest rates rise or tenants don’t pay, a buy-to-let landlord may become bankrupt.  

This evidence would surprise a lot of people.  Ask the typical person in the UK, US or Canada which investment has performed best, and most people would say property.  The evidence suggests otherwise.  

Let’s look at UK house prices.  According to the Land Registry in the UK (http://landregistry.data.gov.uk/) the average property was 55,000 Sterling in 1995, and is now at 225,000 Sterling in 2018, representing a 309% increase.  Even if we don’t factor in the costs of up-keeping the house, which can be huge, the returns are poor compared to markets.  In early 1995, the Dow Jones was sitting at $3,900, and was sitting at $26,616 in 2018, representing a rise of more than 6.5X.  

Once you factor in the lower costs of a stock portfolio and the costs of up keeping a house, which can be substantial if it is a new kitchen or something else which is a big cost, the difference in returns are even bigger.

It isn’t just US markets either. The German Dax was 2,100 in 1995, and almost hit 13,000 in 2018.  The UK FTSE 100 hasn’t performed as well as US or German markets or the FTSE250.  It was sitting at 2,900 in 1995, and was at 7,800 in 2018. 

How about `hot` property markets such as London or some markets in Canada? What we can see is the same pattern.  There are some years they outperform markets, and they have certainly performed better compared to housing in smaller cities, but they haven’t outperformed markets overall, once costs are accountant for.  

As the figures below show, even the super hot London market has slightly underperformed the US markets in common currency.  Once costs such as Stamp Duty (the UK tax for buying a house) and paying for repairs is taken into account, the US Index has outperformed London Housing.  

Type of Asset

1995

                 January 2018 Percentage Change not adjusting for costs of real estate
London House Price

107,590

739,297

+587% Sterling Profit
US Dow Jones Index                              $3,900                            $26,616 +582% USD Profit.  Over 600% Sterling profit.

That isn’t to say that housing can’t beat the markets over a 5, 10 or even 15 year period. The US is a prime example of this. In America, real estate prices increased by 56% between 1999 and 2004, whereas the S&P produced -6%. Over a 25 year period though, from the start of 1980 until 2004, home prices increased by 247% excluding the aforementioned costs, whereas the S&P increased by more than 1000%.  Even in the ten largest US cities, housing underperformed.  Since 2004, the housing crisis of 2007-2008 and subsequent strong equity market performance, the gap has widened

Canada has been one of the hottest property markets in the world.  If you ask the average Canadian or overseas investor, they would assume it had outperformed stock markets.  If we look at the prices of Canadian real estate from 1994 until 2016, we get the following results:

Asset class Price 1994 Price 2016 Percentage gain
Average selling price for detached house in Vancouver $368,800 $1,470,000  299%
S&P/TSX Composite Index $368,800 $2,006, 272

444%

US S&P 500 $368,800 $2,716,520

636%

It is human nature to be a bit egotistical and assume we know more than the average investor, and therefore can spot opportunities in the market.  I am sure there are some people reading this who have made 1000%+ percent on property.  

It is true that you can find properties that outperform the housing market and stock markets, in the same way you can find individual stocks, such as Amazon or Google, that have outperformed the general market.  Certainly many investors in bitcoin have felt smug recently as well!

This is a risky approach, however.  There are so many unknown unknowns and known unknowns, that it is close to impossible over a 40-50 year career to have a good chance to beat the market.  

The fact you can buy thousands of companies cheaply around the world on the stock markets indexes, is a much safer option than relying on 1-2 shares or 1-2 houses.  It sounds obvious, but the culturally ingrained nature of property makes many blind to this fact.  

Finally, let’s consider another factor.  There really isn’t as such thing as a good debt.  Debt is like a noose around your neck, which stops you retiring early or doing the things you want to do.  So even if you do well with leveraged property, those benefits will only come after a significant amount of time, mired in debt.

For anybody with multiple properties already, it makes a lot of sense to sell, and leave just 1 family home maximum. You may just be able to retire or semi-retire on a beach somewhere!

4 Replies to “Why real estate/property outperformance is a complete lie.”

  1. But people can’t invest the equivalent of their mortgage payments into stock markets because they have to pay rent. Therefore buying property wins overall?

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    1. The point is what is cheaper: renting vs buying. I will give you an extreme example. One of my clients spends $4,000 on rent in Shanghai. Owning that same property on mortgage would cost….$8,000 a month! So, you have 4k to invest (net). Now China is an extreme option. But even in American, studies have shown that in 65% of places, renting is cheaper – https://www.forbes.com/sites/morganbrennan/2013/09/20/buying-a-home-still-beats-renting-by-35-in-americas-biggest-cities/. It is true in 35% of cities buying is cheaper. However, many people don’t accept a pay rise in another city due to the mortgage, so indirectly it is a loss for some of those 35%.

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      1. I guess it all depends on where you live. Here in the Netherlands, mortgage costs are much lower than the costs for renting a similar-size property.

        Example: an apartment that costs around 200K euros to buy can be rented for like 900 euros/month. If you get a mortgage, you pay 225 euros in rent ‘n another 400 euros a month towards paying off the mortgage. So you’re only actually “losing” 225 euros vs “losing” 900 euros. That’s 4x the amount.

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      2. Yes it does depend on where you live. With interest rates low in much of the world, buying can be cheaper. But not everywhere. In China buying can be 2x more expensive, and in the US, 65% of cities have cheaper rents.

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