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The Residential Real Estate Premium (Puzzle)

Summary:
On Alphaville, Matthew Klein discusses recent work by Jorda, Knoll, Kuvshinov, Schularick, and Taylor (“The Rate of Return on Everything, 1870–2015“) according to which Residential real estate, not equity, has been the best long-run investment over the course of modern history. … but they didn’t calculate the returns most homeowners actually experience. Most people borrow to buy housing and most people live in their properties without renting them out. This makes a big difference. … Net rental income has historically accounted for half of the total returns from owning housing. It’s also far less volatile, dramatically boosting the Sharpe ratio compared to what you would get just by looking at changes in house prices. Housing has beaten stocks since 1950 because rental income has been

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On Alphaville, Matthew Klein discusses recent work by Jorda, Knoll, Kuvshinov, Schularick, and Taylor (“The Rate of Return on Everything, 1870–2015“) according to which

Residential real estate, not equity, has been the best long-run investment over the course of modern history.

… but they didn’t calculate the returns most homeowners actually experience. Most people borrow to buy housing and most people live in their properties without renting them out. This makes a big difference.

… Net rental income has historically accounted for half of the total returns from owning housing. It’s also far less volatile, dramatically boosting the Sharpe ratio compared to what you would get just by looking at changes in house prices.

Housing has beaten stocks since 1950 because rental income has been better than dividend income, not because house prices have grown more than stock prices.

Dirk Niepelt
Dirk Niepelt is Director of the Study Center Gerzensee and Professor at the University of Bern. A research fellow at the Centre for Economic Policy Research (CEPR, London), CESifo (Munich) research network member and member of the macroeconomic committee of the Verein für Socialpolitik, he served on the board of the Swiss Society of Economics and Statistics and was an invited professor at the University of Lausanne as well as a visiting professor at the Institute for International Economic Studies (IIES) at Stockholm University.

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