Is real estate a good investment over long term when adjusted for inflation?
I recently saw some data from the S&P/Case-Shiller real estate index which was quite surprising. The data is based on US housing valuations, and are adjusted for inflation. I wish I could paste the graph here, but in lieu of that I will describe it.
Starting from a re-based point of 100 in 1890, the index has tracked the following rough path:
1900: 120
1910: 105
1920-1945: 70-80
1950: 110
1950-1970: 110-115
1970s boom: 120 (then back to 110)
1980s boom: as above
1990-c1998: 110
c1998-today: 110-200
Essentially the data argues that, when US housing valuations are adjusted for inflation, over the very long term (1890-1998) residential real estate was pretty much a zero sum game, rising 10% over the period with some short-lived spikes along the way. If we discount the past 10 years as little more than a short term bubble, then it does make me question the received wisdom that property investing is one of the greatest routes to wealth.
Thoughts please....
Answers
4085 points
EthanR answered one year ago …
Wow, great question, but those stats are deceiving, because they leave out so much! All that does is talk about appreciation vs inflation. But lets look at a typcial scenario.
You buy a property for investment purposes. You put down 10-20%, perhaps spend a little on fix up. These days it is easy to get sellers to pay for closing costs. You hold the property for 15, 20, or 30 years. During that time the property appreciates as per your chart above. At the end of the mortgage term, you have a property that in most likelihood will be worth far more than what you paid. But you don't just measure your ROI on what you paid vs the current worth. You measure it on what came out of your pocket during the time of the investment. So on a $150,000 home, only $15,000-30,000 is coming out of your pocket initially.
Over the years you may spend additional monies on repairs, utilities, and occasionally paying the mortgage when the property is vacant. Perhaps in total over time you spend another $25,000-30,000. Let's call it an even $60,000 between down payment and these costs. Yet, if that property should be worth say $450,000 when your mortgage is paid off, you didn't just make the $300,000 of the appreciation. You made $390,000 off your $60,000 pay out. Remember that tenants will pay approximately 90% or more of your mortgage over time. Now if you buy the property right, and have a little bit of positive cash flow each month as well, then even a good chunk of that $25-30,000 for repairs, utilities, and vacancies that I mentioned will be paid by your tenant, increasing your ROI even further.
Now if they are talking about houses that you live in (not rent to others), then they also are leaving out the tax benefits of having a mortgage vs paying rent to a landlord. And of course, once you pay off that mortgage, you pay nothing except taxes, insurance, and maintenance after that. When you sell, you get the benefit of the appreciation. But if you rent all your life, you will always have that monthly rent payment. And when you move out, you get zero.
Read any books on building wealth, and they will always tell you that home ownership is one of the main stays of building wealth. So beware the charts that leave things out!
2775 points
Oldman answered one year ago …
EthanR's response is correct for a real real estate investor. But real estate has a diversification role in one's portfolio, because it's usually inversely correlated with equities and bonds...when interest rates are low, no one wants to buy bonds, so they take out "cheap" mortgages. So REITs and commodities are diversifiers vs inflation and other securities, because their returns aren't well correlated with those of stocks and bonds.
And Ethan is also correct in saying that real estate inflation-adjuisted zero-sum averages are bogus (if you forget about the house you live in, for a moment), you want to buy land, and or timber, when it's cheap, and sell it when it's high. If you sell your house when its price has appreciated, unless you can afford to lease or rent until the housing prices drop, the place you move to is also going to be more expensive. That's called "trading up". I'm not in that business, and EthanR is. So his answer is absolutely best for a real real estate investor.
But, my NHP, HCP, SNH, and other long-term health-care REITs have paid for their purchase decades ago via dividends. And, they're still paying dividends (although I took a bunch of them and sold in May of 2007, when their nominal yields were at those of intermediate govt. bonds) ...REITs are cheap when their yields are at least a few percent above the intermediate bonds...you have risk with REITs...while Govt. bonds are supposed to be "risk-less"...Ha, Ha., except for currency depreciation.
3963 points
MNSL answered one year ago …
Above answers are very good answers. I like to add some more.
Real estates are a good long term investment provided you buy in correct time and for correct value. Location is also very important. For example if you have bought your real estate 10 years ago in key areas and if you have kept until 2005 it would have been a great long term investment.
In addition time to time there will be demand in certain areas. In some areas demand will come down and will stagnate. In fact top long term investors who bought valuable houses 10 years back sold their valuable real estate including houses in 2005 through out the world. Generally those who expect in this area will get above average return in the long run over others with less knowledge.
If you have bought real estates especially last 03 years I do not think it is a long term investment provided you were able to find some tenants? Now some houses are holding without foreclosures thanks to higher rents in some countries.
This situation also will change very soon.
Gradually house inventories are building up and house sales are decreasing in some countries. You find very hardly buyers now. On top of that unemployment is rising and inflation has gone to the roof. Some real estate owners have found difficult to find people to rent their houses now.
Therefore next couples of years we will not see any appreciation of real estates and some industrial experts in this sector expect more worst to come and they do not see sustainable recovery for next 05 years.
