Property vs Stocks: Why Property Outperformance is a Complete Lie

The following is a small sample from my book on the 6 steps towards financial freedom.  

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 (https://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!

Extra reading:

  1. DIY Investors – why do they tend to fail?
  2. How to become rich by investing 
Blog Comments

You seems did not take in account that properties may even be rented?

Sure I do. I am talking about average returns. As I say, buy-to-let can be profitable, but it is high risk. Moreover, if you buy a property on a mortgage, the rent needs to not only outstrip the mortgage costs, but needs to do so dramatically. The difference between long-term stock returns and property is so big, that the rental income needs to be huge.

As you mentioned, you have already noted that buying and renting may outperform the stock markets but have associated risks. But it seems that you may be implying that the risks are higher with buying/renting than the stock markets, which is an opinion and not based on facts as either can perform better/worse or have more/less risk.

My opinion is that investment in buying and renting holds less risk to the competent investor as it provides them more control. In regards to your two points, a fixed rate loan will negate the risk of rising interest rates and tenants not paying can be minimized with location, type of housing, and proper tenant screening.

Sure, unexpected things may occur like a bad tenant slipping through the screening process or a large capital expense, but that’s not much different than the market crashing.

Here’s an article similar to yours but with a different conclusion as it does explore the buy to let scenario that you may deem too risky.
https://investfourmore.com/2015/02/06/stock-market-better-returns-real-estate/

Now, obviously this route requires proper due diligence with properties and screening than simply purchasing shares of an index fund, so I agree that for most investors, it is probably best to stick with the stock market.

Hi Gordon

It isn’t my opinion. Sure there are times when housing outperforms markets, like 2000-2007 when housing outperformed a lot. However, in real inflation adjusted terms, housing has only gone up by about 0.2% in real terms in the US over 100-200 years. Sure some houses have done better than that. And there has been some cities that have done better, but nobody knows which places will do better in the long-term. In comparison, markets have performed at 6.5% after inflation, a 6.3% difference. That isn’t to mention the high cost of housing, which therefore makes the mountain to climb even higher. So you can only beat markets with property over a 50 year investing career if you either, a), Get lucky, b) take huge risks like investing in emerging markets after a huge falls like Turkey now and hope things work out and/or c) Take risks with leverage.

The fact that markets in the US have outperformed property is a fact contained within the academic evidence, not my view.

Adam

Yes, it is a fact that the real estate market appreciates less than stocks.

But it seems your opinion/assumption is that real estate investors are only looking at appreciation.

A large portion, if not most, real estate investors invest with rentals and utilize other strategies like leverage, as you mention, but also buying below market value. When those methods are considered, the real estate investment significantly outperforms the stock market.

Let me know what your thoughts are after reading the second article I posted, I’m curious.

You need to login in order to get to your referred article. And to me, it looks like a money grab.

Real estate is for people who are much smarter than me and who want to do the leg work. I’d rather let the smart people do the leg work for me.

Hmm, not sure if my first comment didn’t post. Regardless, I linked the wrong article, this is the one I was thinking of:
https://investfourmore.com/2014/08/27/better-invest-money-real-estate-stock-market/

You make fait points. Property is liability. But unfortunately its also a necessity. If anything I believe property should be for living in not investing in. And the mortgage you pay never earns interest on itself. You are if anything paying interest which is kind of a rip off.
Lets not forget though every property constitutes a player in the “property market.” which is part of the markets too right?

We all need somewhere to live, and it is true that buying can be cheaper than renting, but renting isn’t always dead money. In some towns and cities, buying a property as a home, and not as an investment, makes sense, but it depends on the rent:buy ratios and other things.

I like this reply. it can be a easy ride with the buy to let but you really do need to vet the renters properly.

Real estate investing has greater returns but also requires work.

Getting properties at a good deal is key to making money. But that usually involves painting, cleaning, and minor fixes. While coworkers are enjoying the weekend, real estate investors are improving properties. It’s great for people who love home projects.

Tenants can be a handful but evictions aren’t that difficult. Clean up can be difficult but worth the reward. New tenants are begging to move in as soon as they see the moving van in the driveway.

Leveraging isn’t risky if you base it on multiple steams of income. Always having a back up to pay the mortgage.

Hi Annie – but it doesn’t have greater returns on average. It is a fact that markets outperform property long-term. A lot of academic data has shown that the average real estate investor gets lower returns than an index investor, even adjusted for things like leverage and money from tenants. Some professional real estate investors get more than the S&P’s 10%, just like 2% of stock pickers beat the S&P. That is a minority though.

Too many factors not taken into account here. Property leveraging makes up for any difference in Stock Market vs Property value increases. Use an example of purchasing a duplex by putting down 25%. Say it’s a $400,000 duplex, you put down $100,000. Your tenants pay your rent (or the vast majority of it) along with minor repairs. You would need a cash reserve for any major repairs, but solid inspections and smart purchases can mitigate much of those repairs.
Let’s argue that value of the property only increases 50% in 15 years. You now have a property worth $600,000, but you have only invested the $100,000. Your property is now paid off and is a 600k asset that’s providing you with $4,000 – $5,000 per month is rental income (minus taxes, insurance, maintenance and management).
Multiply that times 5 over the course of your life and you have a good retirement.

The other factor (besides leverage) that you forgot to calculate into the rate of the return is DEPRECIATION EXPENSE from real estate, which I have used in my high income years and now that I owe the properties free and clear I can do a tax free exhange into 1031 DST’s. In over 40 years of longterm investing real estate has outperformed the stock market and of course with real estate it always is Location, location.

That is a good point in some locations. Not every country though. In fact in some countries investing in real estate is very expensive in terms of taxes and costs.

It isn’t true that real estate, on average, has beaten the stock market. Some real estate markets have, in certain locations, as you say.

But that isn’t comparing apples with apples. If you compare the best locations that is like comparing it to Amazon as a stock. It isn’t easy to pick the best stocks or markets in advance of time.

Therefore, looking at average stock and real estate returns matters more. In other words, the S&P500 vs the average American home, or FTSE All Stars vs the average UK home.

Good analysis

Real Estate vs Stock where should you invest in 2020
People are always confused between real estate and stocks. Some prefer real estate because of the high degree of control associated with property whereas some prefer stocks because of low capital requirements.
Real estate is an excellent way to invest your hard-earned money. If you are looking for a long term investment, you should definitely go for real estate

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