A History of Real Estate Returns

You won’t find much data on the average selling prices of caves during hunter-gatherer times or stone-walled homes in agrarian societies. But economists and analysts have developed a wealth of data on real estate’s performance as an asset class over the last century. If you’re interested in investing in property, reviewing this history of real estate returns is a good place to start.

This post will delve into the data on how real estate has performed for investors over time, citing major research studies. But the bottom line is this: Historical returns show that real estate has been one of the strongest and least volatile investment vehicles for many decades.


What the National Bureau of Economic Research discovered about the history of real estate returns

At the end of 2017, the National Bureau of Economic Research published a research paper called “The Rate of Return on Everything, 1870-2015.”

After analyzing a massive amount of data spanning nearly 150 years and covering all major investment classes in more than a dozen countries, the paper’s authors cite a finding they say was completely unknown until now because of lack of evidence: “Residential real estate, not equity, has been the best long-run investment over the course of modern history.” (This includes multifamily properties.)


Here are some related findings from this study:

Here are some related findings from this study:

  • Returns on housing and equities have been similar over the long term, but the volatility of housing returns is far lower. While both asset classes have averaged about 7% annually, equities have swung wildly, with a standard deviation of 22%, compared to just 10% for housing.
  • This means the compounded return (using a geometric average) is “vastly better for housing than for equities,” 6.6% for real estate investments compared to 4.6% for equities. This finding seems to contradict a basic tenet of asset valuation: higher risks should also signal higher returns.
  • Residential real estate over this long-term period proved only about half as risky as stocks and slightly less risky than even bonds.
  • Arguably, the report notes, “the most surprising result of our study is that the long-run returns on housing and equity look remarkably similar. Yet while returns are comparable, residential real estate is less volatile on a national level, opening up new and interesting risk-premium puzzles.”

The CCIM Institute’s take on the history of real estate returns

When they reviewed the data comparing the long-run returns of real estate and those of other asset classes, here’s what the CCIM Institute found.

  • Real estate’s overall yield to investors between 1987 and 2000 ranged from a low of 11% to a high of 12.4%. During that same timeframe, the yields on 10-year US Treasuries ranged from just 5.4% to 9%.
  • On a risk-adjusted basis, real estate returns have historically been more attractive than those of other assets because of real estate’s far lower standard deviation in overall returns. Real estate’s volatility for example, has historically been 40% less than bonds, which are the next most stable asset class.


How to benefit from the real estate’s track record of strong returns

In their “Rate of Return on Everything” paper, the authors point out that one added element of risk for many real estate investors is that it can be more difficult to diversify in real estate than to spread the same amount of investment capital across a range of equities.

Although this is true for investors who choose to purchase and manage a piece of real property directly, there are ways to diversify a single real estate investment across many properties, and to leave the day-to-day management responsibilities of those properties to professionals. One such vehicle is investing in a private-equity real estate fund. The Worcester Fund, for example, owns and operates a number of multi-family properties across Greater Kansas City as well as makes real estate loans to property owners in the area.

With such an investment, you have the ability to capitalize on of the historical benefits of real estate we’ve discussed in this post – the potential for strong long-term returns (The Worcester Fund delivered investors a greater-than-10% return in 2018) and low volatility relative to other asset classes – as well as passive rather than active investing.