Some very thought-provoking insights from our Head of Research and Acquisitions, Martin Eftimoski. Real estate in Australia offers a clear and nuanced picture of investment returns, offering dependable returns proven time and time again over the long term.
Residential real estate in Australia often feels like a money printing machine to most Australians. If you believe this unequivocally, this post won't provide much value. However, grounding your opinion in falsifiable evidence might be beneficial for your long-term financial health. And there are A LOT of opinions out there about this. And everyone has an axe to grind, including me. So I won't present any analysis of my own, but rather some research from a joint report by Russell Investments and the ASX, who in turn have their own axe to grind. But this report breaks down the average gross return experienced by Australians in different asset classes over a 20-year period. Their analysis includes the effects of tax and gearing, which are typically not considered in most analyses of real estate returns. Now net returns probably are compressed a little bit by the running costs of residential real estate, as compared with the management costs of ETFs. But the difference remains stark. A lot of academic research of real estate as an asset class is underpowered. There are a few reasons for this, the main one being that historically for institutional investors it is not an "investable" asset class. Why even bring the full power of total return estimation to an asset class you can't buy into anyway? That is changing. For those who obsess over what the academic literature has to say, more recent research has found some surprising results by comparing total returns across asset classes that include housing. The best example of this being Jordà, et al. (2019), The Rate of Return on Everything, 1870–2015 in The Quarterly Journal of Economics. They note the following, "In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% per year. Housing outperformed equities before WW2. Since WW2, equities have outperformed housing on average, but had much higher volatility and higher synchronicity with the business cycle. The observation that housing returns are similar to equity returns, but much less volatile, is puzzling." And as a millennial, not only is it puzzling for me, it is immensely frustrating, and I won't weigh in on policies that exist to subsidize owner occupier home-owners, I will just note they exist. And yet as frustrating as it may be for some, over the very long run, housing has proven to be a reliable, well performing source of wealth generation. And moreover, it's very difficult to imagine that changing dramatically anytime soon. #housing #realestateinvesting
