What is the better investment vehicle: Stocks or Real Estate?
It’s a frequently asked question and I tend to talk mostly with people who are biased towards Real Estate. Which is not at all surprising considering my job is to help people buy quality Real Estate and I’m not a stock broker, even if that job still exists in the same form I remember it back in the 20th century.
I recently stumbled upon the following study of long term investment performance from 1870-2015 in a dusty corner of the internet. This study has a lot of graphs and text most of which I didn’t read, however the following paragraph from the summary stood out as noteworthy:
The returns to risky assets, and risk premiums, have been high and stable over the past 150 years, and substantial diversification opportunities exist between risky asset classes, and across countries. Arguably the most surprising result of our study is that long run returns on housing and equity look remarkably similar. Yet while returns are comparable, residential real estate is less volatile on a national level, opening up new and interesting risk premium puzzles.
Source pdf from the Federal Reserve Bank of San Francisco: The Rate of Return on Everything 1870-2015
Over the previous 140 years the returns on rental properties has trounced bonds and equities using the risk adjusted measure of the Sharpe ratio.
The higher the number the ratio the better the risk adjusted return.
- Bonds 0.2
- Equities 0.27
- Rental properties 0.7
Since the 1950s, the Sharpe ratio for rental properties in Australia has sat above 1.0 and Australian property has been a star on the international stage as well.
Should a conclusion be extracted from this data I would say it’s ok to confirm my belief, and the belief of the Australian banks that property is a relatively stable asset class and hence you can borrow more capital, at long periods, with relatively little risk of recall compared with your margin loan on stocks. Thus allowing you to capture more long term growth.
However I do also appreciate stocks and bonds and it would be easy to make scenarios where you would clearly be choosing them over rental properties. Everything depends on the starting assumptions. A couple of million unlevered in an appropriate index fund is going to yield a healthy income and you won’t have to worry about tenants and property managers.
I would personally argue that for a majority of Australian’s that property is a superior investment vehicle compared with stocks. With the assumption being that the goals is to generate a couple of million dollars in net worth from a small starting position, over a couple of decades, with relatively little active involvement in the investment.
