A house is a good asset for reasons that have little to do with price growth
The claim
US house prices have grown only modestly faster than inflation over the long run; housing's competitive total return in the historical record comes largely from rental yield and leverage, neither of which an owner-occupier receives as cash.
Why we rate it moderate
Long price series are well constructed and consistent across sources. Total-return estimates require imputing rent and maintenance, and those adjustments are large enough that reasonable methods disagree about the level.
Shiller's long index of US real home prices is the uncomfortable starting point: over more than a century, real prices grew at a fraction of a percent a year, with the mid-2000s as a conspicuous and temporary exception. The intuition that houses reliably appreciate Real returnReturn after inflation has been removed: what your money can actually buy afterwards, not what the number on the statement says. A 7% return in a 3% inflation year is a real return of about 3.9%.Read the evidence on this → is drawn from a few decades, in a few metros, at a time of falling interest rates.
The total-return picture is much better, and that is the part usually missed. Jordà and co-authors assembled returns on equities, bonds, bills and housing across sixteen advanced economies since 1870, and found housing's Total returnPrice change plus income — dividends for shares, coupons for bonds — with the income assumed reinvested. Quoting price change alone understates long-run equity returns by roughly the dividend yield each year. roughly comparable to equities with substantially lower VolatilityHow much returns scatter around their average, usually measured as a standard deviation. It is a proxy for risk rather than risk itself: it treats an unexpected gain and an unexpected loss identically.. The difference between that and the price series is YieldIncome as a percentage of price. For shares it is dividends over price, for a rental property it is rent over value, and for a bond it is the return implied by today's price if held to maturity.: the return on housing is mostly the flow of shelter it produces, not the change in its price.
For an owner-occupier that yield is real but invisible. You receive it as rent you no longer pay, it is untaxed in the US, and it never appears in the number anyone quotes at a dinner party. It is also reduced by maintenance, property tax and insurance, which the headline calculation almost always omits.
LeverageInvesting with borrowed money, which multiplies both the gain and the loss on the money that is actually yours. A mortgaged house is the most leveraged position most households will ever hold. does the rest. A mortgage multiplies whatever the underlying return is, which is why housing has built more household wealth than equities in most countries — not because the asset is better, but because it is the one asset ordinary households are routinely lent five times their money to buy, and are then prevented by IlliquidityBeing hard to sell quickly at a fair price. A house takes months and several percent in costs to convert to cash, which is why it is a poor answer to an emergency.Read the evidence on this → from selling in a panic.
The planning conclusions are narrow but useful. A primary residence is consumption and an asset at the same time, so treating its full value as retirement funding overstates what is available. Concentration is real: one undiversified, illiquid, leveraged asset in one local labour market, frequently the same market that pays your salary. And the money spent on a bigger house than you need is not invested, which is the trade-off the price-appreciation story hides.
Where this breaks down
- National indices hide enormous local variation. Individual metros have delivered real returns nothing like the average, in both directions.
- Transaction costs on housing are an order of magnitude larger than on funds, which makes short holding periods expensive in a way the annualised numbers conceal.
- The imputed-rent adjustment that makes housing look competitive is an estimate, and its size is contested. Total-return figures are less certain than price figures.
- US tax treatment — deductible mortgage interest for itemisers, the capital gains exclusion on a primary residence — is favourable and could change.
Terms used on this page
The same definitions the underlined words open, written out so nothing on this page depends on a click.
- Total return
- Price change plus income — dividends for shares, coupons for bonds — with the income assumed reinvested. Quoting price change alone understates long-run equity returns by roughly the dividend yield each year.
- Real return
- Return after inflation has been removed: what your money can actually buy afterwards, not what the number on the statement says. A 7% return in a 3% inflation year is a real return of about 3.9%. Evidence →
- Volatility
- How much returns scatter around their average, usually measured as a standard deviation. It is a proxy for risk rather than risk itself: it treats an unexpected gain and an unexpected loss identically.
- Leverage
- Investing with borrowed money, which multiplies both the gain and the loss on the money that is actually yours. A mortgaged house is the most leveraged position most households will ever hold.
- Illiquidity
- Being hard to sell quickly at a fair price. A house takes months and several percent in costs to convert to cash, which is why it is a poor answer to an emergency. Evidence →
- Yield
- Income as a percentage of price. For shares it is dividends over price, for a rental property it is rent over value, and for a bond it is the return implied by today's price if held to maturity.
Sources
Follow these rather than taking our word for the summary.
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan M. Taylor (2019). The Rate of Return on Everything, 1870-2015
The Quarterly Journal of Economics, 134(3), 1225-1298
Finding: Across 16 advanced economies, residential real estate delivered total returns comparable to equities with markedly lower volatility, with most of the return coming from rental yield.
Robert J. Shiller (2015). Irrational Exuberance, 3rd edition
Princeton University Press
Finding: Real US home prices were close to flat over the century before 2000, with the subsequent boom a historical outlier rather than a continuation of trend.