Buy land, they're not making it anymore. – Mark Twain
In 2017, The Federal Reserve Bank of San Francisco released a report titled The Rate of Return on Everything, 1870–2015, which had some stunning implications — In the report, the authors collected data going back to 1870 (~145 years of data) and found that residential real estate had been the best long-run investment over the course of modern history1.
While the returns were slightly higher than equity (with both hovering around 7%), the volatility (std. deviation) of the housing return was substantially lower (10% for housing compared to 22% for equities). The cherry on top is that while global equities have become more correlated with time, housing returns across countries remain uncorrelated.
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In the last 100 years, there were only 2 occasions where the U.S. housing market dropped more than 20% — the 1929 Great Depression and the 2008 Global Financial Crisis. Compare this to the drawdowns the S&P 500 went through, and you can see the stark difference in volatility across the two.
Statistically, even though the U.S. stock market had a higher return, it came with a 120% increase in volatility when compared to the housing market.
The considerably lower volatility leads to an often-overlooked benefit2 of real estate — how easy it is to employ leverage. Using a 4:1 leverage3 is common in real estate but unheard of in equities. With the newly introduced 1% downpayment program, you are approximately taking a 99:1 leverage in your investment.
Finally, the psychological benefit of owning an income-producing tangible asset is incredible. You might panic sell a stock but it’s very unlikely that you panic sell a house from which you are receiving rent.
Given that for an average American, close to 70% of their net worth is tied up in real estate (for Canadians, it’s close to 77%), let’s dig into
How U.S. housing has performed over the past century
Housing market vs. the stock market
Challenges that come with real estate investing
A quick look into Real Estate Investment Trusts (REITs)
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