A house is a good asset for reasons that have little to do with price growth
The claim
US house prices have grown only modestly faster than inflation over the long run; housing's competitive total return in the historical record comes largely from rental yield and leverage, neither of which an owner-occupier receives as cash.
Why we rate it moderate
Long price series are well constructed and consistent across sources. Total-return estimates require imputing rent and maintenance, and those adjustments are large enough that reasonable methods disagree about the level.
Shiller's long index of US real home prices is the uncomfortable starting point: over more than a century, real prices grew at a fraction of a percent a year, with the mid-2000s as a conspicuous and temporary exception. The intuition that houses reliably appreciate in real terms is drawn from a few decades, in a few metros, at a time of falling interest rates.
The total-return picture is much better, and that is the part usually missed. Jordà and co-authors assembled returns on equities, bonds, bills and housing across sixteen advanced economies since 1870, and found housing's total return roughly comparable to equities with substantially lower volatility. The difference between that and the price series is rental yield: the return on housing is mostly the flow of shelter it produces, not the change in its price.
For an owner-occupier that yield is real but invisible. You receive it as rent you no longer pay, it is untaxed in the US, and it never appears in the number anyone quotes at a dinner party. It is also reduced by maintenance, property tax and insurance, which the headline calculation almost always omits.
Leverage does the rest. A mortgage multiplies whatever the underlying return is, which is why housing has built more household wealth than equities in most countries — not because the asset is better, but because it is the one asset ordinary households are routinely lent five times their money to buy, and are then prevented by illiquidity from selling in a panic.
The planning conclusions are narrow but useful. A primary residence is consumption and an asset at the same time, so treating its full value as retirement funding overstates what is available. Concentration is real: one undiversified, illiquid, leveraged asset in one local labour market, frequently the same market that pays your salary. And the money spent on a bigger house than you need is not invested, which is the trade-off the price-appreciation story hides.
Where this breaks down
- National indices hide enormous local variation. Individual metros have delivered real returns nothing like the average, in both directions.
- Transaction costs on housing are an order of magnitude larger than on funds, which makes short holding periods expensive in a way the annualised numbers conceal.
- The imputed-rent adjustment that makes housing look competitive is an estimate, and its size is contested. Total-return figures are less certain than price figures.
- US tax treatment — deductible mortgage interest for itemisers, the capital gains exclusion on a primary residence — is favourable and could change.
Sources
Follow these rather than taking our word for the summary.
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan M. Taylor (2019). The Rate of Return on Everything, 1870-2015
The Quarterly Journal of Economics, 134(3), 1225-1298
Finding: Across 16 advanced economies, residential real estate delivered total returns comparable to equities with markedly lower volatility, with most of the return coming from rental yield.
Robert J. Shiller (2015). Irrational Exuberance, 3rd edition
Princeton University Press
Finding: Real US home prices were close to flat over the century before 2000, with the subsequent boom a historical outlier rather than a continuation of trend.