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Circle Of Competence Issue #2

Recently, I came across an incredibly interesting and ambitious study conducted by economists from UC Davis as well as the Federal Reserve of San Francisco. This study gathered data on the returns of every major asset class (stocks, bonds, and real estate) from 1870-2015 in 16 advanced economies. The kicker with this study is that in addition to including traditional equity and bond total return time series, they have painstakingly constructed a historical time series of total returns for residential real estate that included the price changes as well as rental income. I originally saw this study posted on my favorite real estate related website,, and decided to give it a read for myself. My notes on the study follow.

Notes on method

- Equity and bond returns are total returns - price appreciation as well as dividend income.

- Housing returns are total returns as well - price appreciation with rental income.

- For the total return for housing, the authors constructed the rent to price (yield) index which takes into account net rental income after property management expenses, taxes, insurance, etc. to form a cash flow portion of the returns in addition to general property price appreciation.

- One interesting point to note is that the housing returns are UN-levered - yes that is correct, without any debt applied to leverage equity in properties.

Notes on major findings

Returns across time:

- average real returns on equity from 1870-2015 across 16 advanced economies of 7.1%

- average real returns on housing from 1870-2015 across 16 advanced economies of 7.8%

- average real returns on bonds from 1870-2015 across 16 advanced economies of 2.5%

- Biggest finding of the study is that over long periods of time, residential real estate outperforms equities with higher returns and lower volatility, on an un-leveraged basis (sharpe ratio of ~.7). Imagine how a moderately leveraged investor could have fared over the long term vs. the market!

Link to full study:

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