The article examines residential property as a long-term investment, questioning the widely held belief that property is always an excellent investment choice. Ben Brinkerhoff and Scott Alman present centuries of historical data showing that real estate often doesn’t deliver the returns many investors anticipate.
They highlight Dr. Piet Eichholtz’s Herengracht Index, which tracked housing values in an upmarket Amsterdam neighbourhood over 350 years. This premium area achieved only a 250% total return throughout the entire period, translating to just 0.2% real return per annum. Dr. Eichholtz notes this data “challenged the myth” that real estate values significantly appreciate over time, particularly in central city locations.
Additional evidence from Nobel Prize winner Dr. Robert Shiller’s research on U.S. housing prices dating back to 1890. His research shows that from 1890 to 1990, property prices in the United States remained essentially flat when adjusted for inflation. This explains that housing prices actually declined in real terms from 1900 until roughly the end of World War II, which economists at that time considered “perfectly normal” due to technological advances in home construction.
The analysis identifies several reasons why housing might not be the outstanding investment many believe:
- Historical data shows minimal real returns over very long periods
- Homes become outdated as newer properties offer better amenities
- Simply owning a home doesn’t create real economic value
- Improving housing quality and inflation often distort perceptions of returns
When calculating the real expected return on residential property investment, they broke down the numbers:
- Long-term expected real increase in value: 0.5%
- Gross rental yield: 5.0%
- Less depreciation: 2.5%
- Less rates, tax, insurance, vacancy: 1.5%
- Resulting in a long-term expected real return of approximately 1.5%
After accounting for property management costs (about 8.5% of gross rents), the real expected return drops further to around 1.08%.
The article compares this with stock market performance over the same timeframe. While Shiller’s housing index showed minimal real returns since 1890, the S&P 500 Index delivered a real return of 1153% (about 2.04% annualised) without dividends, and an impressive 236,053% (about 6.41% annualised) with reinvested dividends.
The fundamental difference, they explained, is that property is a passive investment that simply exists unless improved at the owner’s expense, while shares represent businesses that continuously innovate, create, and add new economic value.
The presenters acknowledged that many New Zealanders have built wealth through property investment, particularly during boom periods, but cautioned that these investors “took big risk, and it paid off.” They warned that there is “no long-term precedent for housing to deliver more than a 0.5% to 1.0% real return” and advised careful consideration before making further property investments, especially given recent price increases.