But there is this important tidbit:

> The observation that housing returns are similar to equity returns, but much less volatile, is puzzling. Like Shiller (2000), we find that long-run capital gains on housing are relatively low, around 1% p.a. in real terms, and considerably lower than capital gains in the stock market. However, the rental yield component is typically considerably higher and more stable than the dividend yield of equities so that total returns are of comparable magnitude.

In other words, it's the rental yield, not the capital gains, that make up for the difference.

I'd also add the "past performance is no guarantee of future results" caveat. The time period studied was one of immense population growth, so in advanced economies with plummeting birthrates a different primary driving factor could take hold.

Wonder whether REIT stocks act more like RE or equity stocks in that regard.

If you’re buying a diversified basket of real estate assets it should behave like real estate over the long term. As a tradable security with a deep and liquid market measured volatility will probably be higher but that’s going to be more a function of far more frequent changes in partial ownership than actual changes in underlying value.

Do REITs provide exposure to rental gains?

Absolutely. In order to qualify they must pass through 90% of their profit as dividends. Just be sure to chose REITs that invest in real estate the way you want.

Still reading, but is that factoring in the labor and opportunity cost of managing a rental property?

I'm pretty sure you dont try to factor opportunity costs into an investment. You only compare returns of different investments. Labor is a legit expense weather you pay someone or maintain your own rental property. Maybe that's what you meant, you own opportunity to do higher paying work?

I mean, I can:

1. Invest in an index fund, which I deposit into automatically every month, at X% return and Y% risk.

2. Invest in a rental property, which I then have to spend time to manage (or pay someone to manage), at the same X% return and Y% risk.

I wondering how you're supposed to account for the difference between the two. Even if I don't hire someone to manage my property, I still have to spend time managing it, which can have a significant opportunity cost.

>> Even if I don't hire someone to manage my property, I still have to spend time managing it, which can have a significant opportunity cost.

I am not a finance person, but it seems you're talking about two possible investments. One in a rental property and one with your time. If you manage the rental yourself then there is an opportunity cost where your time may have been better spent somewhere else. If you pay to have it maintained/managed then you are free to invest your time in whatever you like. You need to figure out the value of your time to make sense of it.

You simply take out the cost from the returns. If it's true that both increments have X% return (at Y % risk), then the index fund which don't require the extra maintenance cost is higher yield.

The real issue is you won't know Y until afterwards.

You are reading it ... incompletely and getting the incorrect impression that real estate is a better investment than equities, which it absolutely IS NOT. The study explicitly neglects to factor in "leveraged real estate."

So you spend $1,000,000 on a house. With interest on a 30 year note, typically, that house with interest will cost $3,000,000 total. As an investment most people only consider capital gains, but the majority of gains according to the PDF are from rental income.

Source, Page 3, paragraph 2:

The majority of households in advanced economies today hold a leveraged portfolio in their local real estate market. As with any leveraged portfolio, this significantly increases both the risk and the return associated with the investment. And today, unlike in the early twentieth century, houses can be levered much more than equities. The benchmark rent-price ratios from the IPD used to construct estimates of the return to housing refer to rent-price ratios of unleveraged real estate. Consequently, the estimates presented so far constitute only un-levered housing returns of a hypothetical long-only investor, which is symmetric to the way we (and the literature) have treated equities.

I strongly suspect that the study, like many others before it, is flawed in the way it calculates the return on housing investment. In terms of capital gains, I see no evidence that like is compared with like, I suspect that a 1930s house is considered the same as a 2010s house for the purpose of capital gain calculation, and no account is made that the house may have been renovated or entirely rebuilt several times. The high cost of buying and selling a house is, I suspect, neglected.

I furthermore suspect that in calculating rental return, no account has been made of vacancy rates, agent's fees, insurances, repairs etc.

Soooo... in summary, although this report implies that housing has been a better investment than stocks... I suspect it hasn't.

That's a glaring omission, if true. It seems that they'd be looking at earnings (that is, they'd be subtracting costs, and looking only at profit in the end). Otherwise, yeah. This is a pretty bad analysis.

Either way, if real estate averages about 1% better yield than equities, I'd go with equities, because they don't require maintenance, other than reading an occasional financial statement (or if you're indexing, not even that).

Globally yes. But not if you look at it country by country, see page 37.

Correct