What isn't? Volatile market value, risks of breakdowns and fires and previously undiscovered structural flaws, fires, natural distasters, etc. It's putting a lot of your eggs in one basket, which in investment terms is same as foregoing diversification, ie taking on a lot of risk for no corresponding increase in returns. Depending on jurisdiction, risk of unfair treatment in a divorce. High transaction costs when changing housing due to changing life circumstances. And to top it off you are binding the important service of having a roof over your head to the fate of this investment.

Home process in the US are historically very stable. I would think this is also true in Europe? As for diversification, your house shouldn’t be your only investment. As for fires and natural disasters, this is why insurance exists. Owning a home isn’t for everyone, but I don’t think there’s anything particularly risky about it as far as investments go.

Are you looking at home prices as aggregate? It will naturally seem a lot more stable then since you are then looking at what you'd have if you had diversification! As for individual cases of housing, I think we've recently seen enough discussion of CA volatility to conclude that at least big cities have a lot of volatility in individual housing units.

(Of course this all depends on the alternative too: renting regulations vary widely over the world in how strong the position of the occupants is wrt rent increases and landlord initiated termination)

I’m not talking about California (which is anomalous in many respects), but I am talking about the general market in various municipalities as well as anecdata from various people about their property values increasing from year to year.

Buying a home in a tolerable location costs at least 200k in my area and upkeep isn't free either. I can rent an apartment in a much better area for fifteen to twenty years for just the initial investment.

A house can easily lose its value or at least cause large expenses, e.g. if the cellar floods or develops mold problems. Or if the surrounding neighborhood becomes worse.

Selling houses has a large transaction cost.

I really don't see much benefits to owning over renting. I'd rather have 200k in a diversified portfolio that earns me 5k a year after taxes and has a much lower probability of losing 30% of its value while living in an apartment in a central location than own a house in a suburb that costs me a few thousand a year in upkeep and taxes. I'd likely need to buy a car too in that case, which is another few thousand a year.

> I'd rather have 200k in a diversified portfolio that earns me 5k a year

From a financial point of you a difference is that to do this you need to have 200k cash, while you can borrow most of the money to buy a 200k house.

There is a leveraging effect when investing in property.

I think the economic tradeoffs in buying a house are pretty country specific. For example, renters in Germany have very strong legal protection. It is very difficult for your landlord to kick you out, or raise the rent dramatically. I could certainly afford to buy the flat I live in, but I prefer to have the money invested in the stock market instead, and have someone to call (who also pays for) any problems. I also lived in rented apartments in France and UK, and it felt significantly different: Limited-term contracts, poor maintenance, (poorly) furnished - I would not want to live that way forever (of course, I choose these contracts because I only intended to stay for a limited time).

Interestingly, in Poland, it's the renter who is responsible for taking care of all problems, except structural ones and perhaps stuff like mold. Everything else is on the renter, and he is expected to return the house in "no worse" condition on the lease's end - meaning, repairing all the white goods in the house if they break etc.

Germany takes care of that problem by not supplying a kitchen or any white goods at all when renting an apartment. Of course, exceptions apply and some landlords do offer an EBK (fitted kitchen) when renting.

Shouldn't you also factor rent into your calculations? I don't know how high it is on 200k property, but I assume it's significantly higher than 5k/year. Owning a house is risky for the reasons you've mentioned, but might give you higher returns.

Like I said, owning isn’t for everyone (my point is only that it’s not an extraordinarily risky investment contrary to the OP’s claim). 5k a year isn’t rent in most places.

You should also consider the liquidity risk when selling a house. The MSFT stock is traded thousands of times per day, so there is strong consensus on its price. A house like yours in a neighborhood like yours is maybe traded once per year, so there will be less consensus and you would have to wait longer for a suitable buyer or discount the price.

How volatile is the housing market in Germany? And there are solutions to the other problems - getting the house properly surveyed before buying, insurance for fires.

The long-term trend in Germany has been a movement from rural to urban areas, and immigration from outside of Germany to German cities. So if you had an apartment or house in a city you are sitting pretty, not so much if you had the same in a small town or village.

> What’s risky about the investment?

The German population is shrinking.

Real estate as a safe and stable investment in the long term relies on steady population growth to insure that demand will always be there for you to be able to sell at a good price.

Of course, if you buy in the most desirable locations you may be shielded from this because demand outstrips supply by a huge margin to begin with.

Doesn't that really depend on where and culture? If you bought a house in Detroit in 1965 you aren't likely doing well today. If you bought in San Francisco in 2019 you're probably under today (though that may fix itself). If you bought in Japan almost anywhere you now have a used house which like a used car only goes down in value. If you're lucky the land goes up but condos/apartments you don't usually own the land and even then only in prime locations. Most locations land is likely losing value as the population declines. Land in Ginza (the most expensive land in Japan) only recently passed its late 1980s price per square meter.

Yes, there are extreme examples, just like there are extreme examples in the stock market.

You can diversify in the stock market (in fact for most people investing in funds it's the default), you cannot diversify in your housing investment.

The argument is that home ownership isn't a worse risk-adjusted investment than stocks. If you know how to reduce risk in the stock market without correspondingly reducing your returns, do share.

I believe that is also not true. Case Shiller is up barely ~x3 since 1990 including the recent large bump [1]; SP500 appears to be ~x12 since 1990. Inflation-adjusted, according to Wikipedia, Case Shiller National index is up ~25% since 2000.

Also, extreme risks is not what most people aim for in investing when most of their net worth is involved; the utility of money is not linear.

[1] https://fred.stlouisfed.org/series/CSUSHPINSA

> If you know how to reduce risk in the stock market without correspondingly reducing your returns, do share.

If you want to do it without reducing your expected returns you diversify to products with similar expected returns and, to the extent practical, mutually independent risks.

I don't see how this can be true. If you're splitting your investment, your downsides are smaller but your upsides are also smaller, and presumably by the same amount.

> I don’t see how this can be true.

How could it not?

> If you’re splitting your investment, your downsides are smaller but your upsides are also smaller, and presumably by the same amount.

Yes, and your expected return remains the same. Reducing variability isn’t “reducing returns”, because, as you note, what you lose from reducing the 50+nth percentile returns is made up for by increasing the 50-nth percentile returns.

Buying your home isn't an investment, it's only an investment if you can sell it at any time.

Risks of buying your home include: - Not being able to move if you can't sell (because the market isn't right) - Being stuck in a house where you pay a high mortgage while you could rent for much less after a crash (what happened in Spain after 2008). Note than in US you can give up your house and your mortgage goes away, but that doesn't work this way in Europe. The bank sells your house and if it doesn't cover the mortgage you still owe the rest

Also if you sell too early after buying, you're losing money because you pay more in transaction fees that you would have in rent (unless there is a big spike in prices).

Anyway, for a long time real estate have been steadily appreciating and people (especially boomers) got used to it, to the point that all their reasoning about real estate is that it's appreciating faster than inflation. It was true for a long period but that's no longer the case.

If you live in a country with mass migration then both house prices and rental prices increase almost constantly. I lived in London from 1996-2015. I bought a house in 2000, it tripled in value by 2015 and I sold up and moved out of London. Its kind of mad.

divorce, for example, is one major risk

I don’t think this is any different than with stock market wealth.

you can divide stock between 2 parties, maybe fair, maybe unfair, but that's it. A house will be up for sale when neither can afford it on their own, and a lot of money gets lost just in the process

Ah, fair point.