Yes, just to clarify, Neal Axelrod CPA posted a comment… and another Neal who didn’t post his last name so I won’t provide it either also posted a comment.

For the record, appreciate the comments of both Neals! Criticism and discussion of ideas sharpens them! Thank you guys.

This statement, “The study just generates gross return numbers for housing by combining increase in property value plus rental income…” isn’t how I read the report. I read the report to say they couldn’t include one expense, property taxes. They estimate that expense would decrease the return by roughly 1 percent. Even with that 1 percent decrease, on average housing returns according to their data beats equity returns in most countries over most time periods.

BTW, this quote from page 20 of the report concerning expenses, ” …rental yields reflect net income—net of property management costs, ground rent, and other irrecoverable expenditure—as a percentage of the capital employed. The rental yields calculated using the rent-price approach detailed in Section II.D are therefore net yields”

Also, this quote from page 31, “… property taxes would lower real estate returns by less than 1.0 pps per year relative to equity.”

Regarding the selling costs, the paper addresses that too. Their math compares the frequent low transaction costs of equity investments with the infrequent high transaction costs of housing.

This quote from page 31, ” though equity transaction costs are probably somewhat lower, the difference between two asset classes is likely to be small—and no more than 0.5 pps per year. ”

So, though many people’s first reaction to the data is to say, “well, they’ve left out costs!…” that really turns out to not be case. (The other thing I would say about costs is this: Lots of the equity return data leaves out costs too. It was, for example, impossible to build a well-diversified equities portfolio at nearly zero cost for most of the 150 years.)

Regarding actually “getting” the national housing index return, as noted in the original blog post I did about this, yup, agree with that.

The problem with the study and its conclusions is that the housing analysis is not total return net of expenses and thus not an apples to apples comparison with stocks. The study just generates gross return numbers for housing by combining increase in property value plus rental income. Of course, this doesn’t include the ongoing expenses of property taxes, insurance, repairs/maintenance and, for landlords, vacancy. It also doesn’t include management costs or debt service, which many landlords would also have to pay. I know it would be difficult to impossible to calculate those and add them in, but of course the returns for stocks are not just the returns of the companies’ assets but instead the whole businesses including all costs (including management and debt service). So it’s fine to generate the returns for stocks and housing and show them together, but don’t try to compare the numbers for the two when calculated this way and try to conclude that housing returns compare somehow to stock returns, because you haven’t come close to calculating the actual total return to investing in housing in a way that would be on par with what stock returns represent.

Especially when you add in the cost of selling the investment — which can be as much as 10% of the gross sale price for real estate but is relatively negligible for stocks.

After all those costs that haven’t been taken into account, I can only conclude that stocks must generally outperform real estate. How could it be different if the gross returns of the housing asset without accounting for any expenses of owning it are still only slightly higher than that of publicly listed stocks that represent the net returns of entire businesses after all expenses?

And this of course ignores the other downsides to owning real estate, which include concentration / difficulty to diversify, illiquidity, difficulty to value, and poor granularity in investment amount.

Really the only benefit I come away with for housing is potential non correlation with other investments. Even that failed in the 2008 crisis, and at other points in history as shown in the line charts here.

Hi Neal, so first, totally appreciate your points. Thank you. Also, totally agree real estate is a business. Also I’ve seen lots of people fail too. I’ve had a CPA firm twice. The first time in the early to mid 1980s I emphasized real estate. That was a tough time…

Here’s where we differ I guess. First, I do see people succeed. Also, I think a good study shows the real estate investment can make people money–and more money that equities. You might want to look at the “Rate of Return of Everything” blog posts we’ve done here, starting with this one since it’s easiest to process:
http://evergreensmallbusiness.com/rate-of-return-of-everything-study-in-line-charts/