Don’t be misled: Aussie stocks and bonds outperform residential real estate

Overview

Most comparisons of the returns – or assertions about the relative returns – of Australian stocks and residential real estate (“RRE,” which is often described by the ambiguous shorthand “property”) suffer from one or more of three severe drawbacks. Consequently, as a whole they’re fatally flawed:

1. They lack an explicit ethical and philosophical basis. That’s surprising: homeownership in Australia has long been virtually synonymous with membership in the middle class; moreover, and even more fundamentally, widespread homeownership has been a pillar of social stability and legitimacy.
2. Also missing from these claims is a theoretical foundation. That’s hardly unexpected: there are strong reasons to expect that RRE will underperform stocks.
3. Empirically, assertions about RRE’s returns range from inadequate to laughable: many rely upon irrelevancies such as personal anecdotes and idle opinions; they also omit analyses of long series of valid and reliable data; frequently, they grossly underestimate RRE’s high ongoing costs and thus overestimate its yield.

This article redresses these weaknesses. It draws a fundamental distinction between owning (a) your principal place of residence and (b) “investment property.” The former has long – and rightly – been a virtual requisite of a middle-class standard of living and a pillar of a stable and thriving society; the latter, when compared to stocks on a “like for like” basis, is a route to mediocre – compared to its advocates’ assertions – returns. 

The results of my analysis will startle most people and disconcert RRE investors. That’s because Americans – and, it seems, most Australian RRE investors – readily comprehend (a) but woefully misunderstand (b).

Comparing the total (capital growth and income) returns of the All Ordinaries Index and the 10-year Australian Commonwealth Bond to my estimate of RRE’s total return, I demonstrate – even after deliberately weighting the scales in favour of RRE– that over the past half-century stocks and Australian Government 10-Year bonds have outperformed. Indeed, stocks have trounced RRE.

I’ve also calculated stocks’ and RRE’s total returns over all 25-year, 10-year, five-year and one-year intervals since 1974. The results – for proponents of “investment property” – should be sobering: over all of these shorter timeframes, stocks mostly outperform RRE; so, over longer timeframes, do bonds.

Stocks outperform bonds, and bonds outperform RRE. So don’t be fooled: owning your principal place of residence confers enormous, concrete and intangible benefits to yourself, your family and society as a whole; but owning “investment property” is generally a high-cost route to low returns.

A Preliminary: What a Plurality of People Believe

Each year for many years, Gallup, the global polling organisation, has asked random samples of American adults: “which of the following (bonds, real estate, savings accounts (CDs), stocks-mutual funds, gold or crypto-currency) do you think is the best long-term investment?” (Gallup included “crypto” for the first time in 2022.)

Figure 1 plots the results over the past decade. (To improve legibility, I’ve combined bonds and CDs, known in Australia as term deposits (TDs), into a single category.) Americans have – continuously and by a wide margin – regarded “real estate” (which I assume means RRE) as the best option. Moreover, over time a growing percentage has regarded it so. Australians’ attitudes seem to be broadly similar (see, for example, Figure 16 in the ASX Australian Investor Study 2020).

Figure 1: What Do American Adults Regard as the Best Long-Term Investment? Percentages from Gallup Surveys, 2014-2024

Underlying Gallup’s results is a crucial point that most comparisons of stocks’ and RRE’s returns seem tacitly to understand but usually fail to state clearly: the pros and cons of equities and RRE are subjective.

What one person regards as a strong advantage of stocks, another might regard as a mild advantage and a third person as a disadvantage. The same point applies to the pros and cons of RRE. Accordingly, it’s entirely possible that a minority of skilled (perhaps because they love its attributes) RRE investors generate above-average long-term returns. By definition, however, the majority can’t beat the average – and the odds have long been against the outperformance of investment property.

In this instance, in other words, “what a plurality of people tells Gallup” and “what actually is” are – as we’ll see – hardly the same thing.

The Ethical Foundation

Given the circumstances of time and place, limitations of resources, etc., people applaud whatever fills a crucial need – and don’t ponder its ethical or philosophical basis. Perhaps that’s why proponents of investment in RRE usually fail to shoot – or even notice – the most powerful arrow in their quiver: the fundamental link between the ownership of one’s own home and the personal and social benefits that follow in its wake.

Figure 2:Median Financial Net Worth, American Homeowners versus Renters, Thousands of CPI-Adjusted $US, 1989-2022

Figure 2, which plots data from Survey of Consumer Finances, quantifies the immense individual and family benefits of home ownership. SCF is a statistical survey which has been conducted every three years since 1989 of the balance sheet, income and demographic characteristics of American households. The U.S. Federal Reserve Board and Treasury co-sponsor it, and since 1992 the National Opinion Research Center at the University of Chicago has collected the data.

It’s hardly surprising that Americans have – continuously and by a wide and rising margin – regarded RRE as the best investment. That’s because the disparity of financial net worth between homeowners and renters isn’t merely startling: it’s shocking.

Between 1989 and 2022, the median net worth of home-owning households, expressed in CPI-adjusted (2022) dollars, grew from $231,000 to $396,000; that’s a compound annual growth rate of 7.6% per year. The median is the 50^th percentile: in 1989, the net worth of half of home-owning households was greater than $231,000, and that of the other half was less than $231,000. Net worth is the sum of what the household owns (home, stocks, bonds, superannuation, cash, non-home RRE, etc.) net of what it owes (mortgage, car, credit card and other debt, etc.).

American households which don’t own their own home have practically no financial net worth: adjusted for CPI, the median rose from $5,000 in 1989 to $10,000 in 2022. Ironically, that’s a higher CAGR (9.3%) than for homeowners (albeit from a negligible base).

A big disparity of financial net worth, I suspect, also distinguishes owners and renters in Australia. In the U.S., households which rent rather than own their own homes are disproportionately low-income, low-education (no high school certificate), black and Hispanic. Home-owning households have higher median incomes and educational qualifications (usually a secondary and sometimes a tertiary degree) and are disproportionately white; crucially, however, among home-owning households the disparity of net worth between whites on the one hand and blacks and Hispanics on the other is much smaller than the enormous chasm of net worth between homeowners and renters.

In the U.S., homeownership isn’t merely a vital means of entry into the middle class; it’s also a tremendous leveler of racial economic disparities.

Much the same is true in Australia: most encouragingly, according to the Australian Housing and Urban Research Institute (“Indigenous housing support in Australia: the lay of the land,” 12 February 2025), 42% of Aboriginal and Torres Strait Islander households owned their homes in 2021 (14% outright and another 28% via a mortgage, versus a total of just 25% in 1981 and 66% of Australians as a whole in 2021).

The concrete and individual advantages of home ownership are enormous. The intangible and social benefits, too, are vital.

Since Antiquity, the connection between the diffuse ownership of private property (initially of land, farms, etc., much more recently of bonds, equities, RRE, etc.) and the stability and vitality of a society and political order has been clear (see in particular Victor Davis Hanson, The Other Greeks: The Family Farm and the Agrarian Roots of Western Civilization, University of California Press, 1999). Then and now, ownership of one’s principal place of residence provides independence and security: unlike renters, owners hold permanent tenure and corresponding peace of mind.

Widespread homeownership thus provides a critical mass of people who possess a stake in a neighborhood’s, town’s and nation’s present and future. A moral and prosperous society is therefore one whose property is mostly privately owned and whose ownership is widely dispersed. Similarly, an astute and ethical government upholds principles and enacts just policies which encourage the ownership of private property to broaden and deepen.

Are renters inherently less moral, community-minded, etc., than owners? Of course not! Yet it’s indisputable that their tenure is less secure than owners’. It’s also unarguable: most of today’s renters, if they had a choice – that is, if they could afford it – would gladly become homeowners.

Figure 3: Rate of Homeownership, U.S., 1965-2025

Hence a troubling issue: if ever more people believe that they cannot open the door to homeownership, no matter how hard they strive, then their stake in society – and their sense of its legitimacy and fairness – erodes. The rate of ownership in the U.S. hasn’t trended downwards; it’s fluctuated cyclically (Figure 3). In Australia, however, according to the ABS, it’s eroded steadily from 71% in 1999 to 66% in 2022.

The falling affordability of home ownership since the GFC is hard to deny – and, among other things, seems to blunt the desire of young adults to start families. Perhaps most worrying, home-ownership may be becoming the preserve of a narrower (older and, partly for that reason, richer) cohort; ever more in recent years, it’s been an ever less realistic aspiration for younger people who’re prepared to work hard and save.

Mass home ownership, in short, presupposes a mass of people who can reasonably aspire to become homeowners.

The Theoretical Basis

In 2013, the Royal Swedish Academy of Sciences awarded to Robert Shiller, an economist at Yale University, that year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (which is universally but erroneously known as “The Nobel Prize in Economics”). The Academy recognised Shiller’s research in financial markets – particularly his explanations of the very long-term (since the 19^th century) fluctuations and returns of stocks, bonds and RRE. His book Irrational Exuberance (Princeton University Press, 1^st ed., 2003, revised and expanded 3^rd ed., 2015) summarises much of this research in a clear and accessible manner. 

Advocates of investment in RRE almost invariably ignore Shiller’s research and its results. It’s easy to understand why.

“The bottom line,” he concluded his review of very long term (since 1890) series price data which he compiled, “appears to be that ... most of the evidence points to disappointingly low average rates of real (that is, CPI-adjusted) appreciation of most homes.” Indeed, in a crucial respect over most of this interval, residential real estate became cheaper: “real home price growth (was) less than real per capita disposable income growth, which was 2.0% per year from 1929 to 2013.”

Shiller continued: “the reader may be puzzled that these data show so little evidence of an increase in real home prices in the U.S. over so long a period. The popular notion that real estate prices (always) go up is very strong ... Isn’t land scarce, and isn’t its price going to go up steadily as population ... and the level of prosperity increases?”

“Actually,” he notes, “the theoretical argument that home prices can be expected to appreciate faster than consumer prices in general is not strong.”

Why not? One reason, he said, is “technological progress in the increasingly mechanised construction industry may proceed faster than ... in other sectors ...” In particular, new materials, construction and prefabrication equipment, as well as new technology to build high-rise apartment buildings, “may make housing cheaper. If new homes can be built more cheaply, then the price of homes should tend to fall relative to other prices ...”

If, on the other hand, the construction industry’s productivity lags the rest of the economy, or even sags in absolute terms, as the Productivity Commission finds in Australia (see Housing construction productivity: Can we fix it? 16 February 2025), the price of homes will tend to rise relative to other prices.

Land, its availability and thus its price also helps to explain RRE’s relative underperformance. “Public attention seems to focus most on congested big cities that have little land available for building, and where land prices can get very high. But most cities have abundant land ... These abundant-land cities show long-run price paths that never deviate too far from building costs ... If ever home prices were (greatly) to exceed the cost of construction, there would (all else equal) be an incentive for builders to supply more houses, and a steady increase in supply would continue until the extra supply depressed price back down to cost.”

Moreover, “the situation in these stable cities ought to be considered typical of much of the U.S. The land on which homes are built is of course limited ... they are not making any more land. But almost all of the country’s land is still in agriculture, forestry or other non-intensive uses; this is land whose price is very low per buildable lot, and so there is still plenty of room ... According to the 2010 census, urban land area was only 3.1% of total land area in the U.S.”

In Australia, urban land presently comprises less than 0.5% of all land – versus, according to Demographia.com, 1.4% of New Zealand, 2% of Scotland, 3% of arable parts of Canada, 8% of England and Wales, 12% of France, 14% of Japan, 18% of Switzerland, 20% of Italy, 27% of Germany and 28% of Holland.

Germany and The Netherlands, in other words, might lack horizontal space for housing, but the U.S., Scotland, Canada, New Zealand and above all Australia certainly don’t. Large potential supply, other things equal, implies low potential price.

Shiller readily acknowledges a key point: there’s little empty land in the centres of Los Angeles, New York, London Sydney, etc. “And yet the same safety valve ought to operate (in these cities) to prevent home prices from rising too far ... When home prices rise to the point that mortgage payments take up a large share of family income, there is a powerful incentive to move to a lower-cost area (say, outer suburbs where land is available and homebuilding is occurring). This safety valve tends, in the long term, to prevent the price of homes from rising too much in real terms and to burst bubbles that have inflated too far.”

Beyond this, Shiller cites a third factor: “very high home prices create political pressures for the easing of land-use restrictions. Eventually there is an increase of supply of homes (for example in high-rise apartments) in the glamorous cities ... Thus, in glamorous speculative cities, there has been a tendency for home prices to rise and crash, but to show little long-term trend.”

Shiller’s review of long-term house price data concludes: “owner-occupied housing (in the U.S.) is looking like a bad long-term investment relative to the stock market: ... nationally it has offered practically no capital gains for long-term investors.”

He distinguishes between owner-occupied housing and RRE investment, and elaborates: “... one must remember the implicit dividends that one receives from living in (one’s own) home, that is, the value of the shelter and other services provided by a home. These dividends are untaxed. It is often said (correctly) that there is a tax advantage to owning rather than renting. If one swapped houses with one’s neighbour living in an identical house and each paid rent to the other (so that the rent received would cancel out the rent paid), the transaction would be virtually meaningless from an economic standpoint, but it would incur taxes, since the rent received would be taxable, while the rent paid would not be deductible.”

“For this reason,” Shiller reckons, “most people are well-advised (if they can afford it) to buy rather than rent the homes they live in.”

The Subjective Underpinning

Past and potential future returns shouldn’t be the only factor to consider when choosing investments. Take, for example, an investor who greatly dislikes price volatility – the daily, weekly, monthly, yearly, etc., ups and downs of prices. The returns of publicly-listed equities, considered as a whole, are much more volatile than those of unquoted residential real estate. Accordingly, even though stocks generated higher long-term returns than RRE, she might nonetheless prefer “stable” RRE to “unstable” equities.  

As a brief aside, the price of RRE isn’t innately stable: it’s largely a result of its illiquidity – that is, the fact that it isn’t publicly-listed. If the price of houses were quoted in real time on an exchange, they’d be much more volatile.

Another investor might be strongly averse to debt. On that basis, he might prefer an ungeared investment in equities to a heavily-geared one in RRE. Gearing is the amount of debt that an investor owes relative to her equity (value of assets net of debt) in the investments she owns. It’s calculated by dividing total debt by total equity.

“Average gearing in (investment RRE),” says Core Research’s web site (undated), “is currently around 60%, which means that for every $100 of equity (an investor has) $60 of debt.” Given that liabilities + equity = assets, as well as my assumption that mortgage debt constitutes the vast majority of the liabilities on a RRE investor’s balance sheet, then for every $160 of RRE assets an investor owns, he has $60 of debt; hence debt is $60 ÷ $160 = 38% of assets. Some retail investors borrow to buy shares, but the typical stock investor’s gearing ratio is much closer to 0% than to 38%.

Finally, an investor might prefer direct and concrete ownership to indirect and somewhat abstract ownership. A house is a physical asset which has tangible utility. You can see and touch a piece of land; you can also rent a flat. Stocks and bonds, in contrast, aren’t physical assets, and they don’t have utility in the same way that RRE does. If you own a given percentage of a company’s stock, for example, you own a corresponding percentage of its net assets (equity) – but not its assets.

In a legal sense, the ownership of stocks is real; psychologically, however, and compared to an investment property, it’s abstract. Perhaps that’s another reason why Gallup consistently finds that Americans regard RRE as the best path to building wealth.

Table 1 lists a few of the key contrasts between investment RRE and equities. For reasons of brevity I’ve omitted what some people might reasonably regard as key differences. And that’s its key point: these distinctions are subjective. Table 1 lists them alphabetically, but if you and I ranked them in order of importance, it’s likely that our rankings would differ – perhaps greatly. Given our different preferences and aversions, our portfolios (weightings to stocks and RRE) will also differ.

It therefore bears repetition: past and potential future returns shouldn’t be the only – or even the major – factor to consider when choosing investments.

It’s also vital to emphasise that the ongoing cost of a portfolio of RRE is far greater than an equivalent (by market value) portfolio of stocks. Investment RRE is usually heavily geared; hence investors pay hefty interest as a percentage of income. They also face property taxes, maintenance, depreciation and insurance, etc., expenses.

Table 1: Australian RRE and Stocks – a Few Key Differences

These ongoing costs typically comprise 100% or more of rental income and at least 4% of RRE’s market value. By comparison, many equity funds’ total expenses are 1% of assets, and low-cost index funds can charge annual fees as low as to 0.1% of assets.

My impression, based upon many discussions over the years, is that some RRE investors are well aware of these costs – and many more have little or no idea about them. Ryan Fox and Peter Tulip (“Is Housing Overvalued?” RBA Research Discussion Paper 2014-06) used data from landlords’ claims to the ATO to quantify them. Table 2 expresses them as percentages of rental income and market value.

Table 2: Major Annual Costs of Investment RRE

These costs are tax-deductible. Equally, they consume all of the average investor’s rental income. The deductibility reduces the investor’s tax bill, but the huge expense as a percentage of rent eliminates his pre-tax income.

I’ll Compare Like with Like – and Weight the Scales in Favour of RRE

To compare the long-term, total (that is, dividend or rent plus capital gain), CPI-adjusted returns of the All Ordinaries Index and RRE, it’s vital to compare like with like. Hence my two crucial definitions:

• Stocks’ dividend yield is its dividend at a given point in time divided by the Index’s level at that time. On 31 December 2024, for example, the All Ordinaries Index’s dividend was $317 and its level was 8,421; accordingly, its dividend yield was 3.8%.
• Similarly, RRE’s net rental yield is income received over the past year, less ongoing cash and non-cash expenses (including mortgage interest, depreciation, etc.), divided by current market value.

Stocks’ dividends are paid from earnings, and earnings are calculated according to generally-accepted accounting principles (GAAP) – which means that they’re net of non-cash as well as cash expenses. These cash expenses include interest on debt; non-cash expenses include amortisation and depreciation. Calculations of RRE’s rental income and yield commonly exclude interest and depreciation expense (see, for example, “How to Calculate Rental Yield” on Westpac’s website). 

They thereby over-estimate RRE’s yield. In order properly to compare RRE’s and stocks’ long-term returns, we must include cash and non-cash (including interest and depreciation) expenses into our estimate of rental yield.

Tuan Duong (“Rental Property Depreciation Rates: What is the Rate for Older Properties?” duotax.com.au, 16 January 2025), estimates that “up to 70% of investors don’t claim depreciation and miss out on significant tax benefits simply due to confusion or misconceptions surrounding rental property depreciation rates ...” He explains the concept of depreciation, how to claim it – and provides a hypothetical example of its impact upon a typical investor’s return.

“Shelly,” Duong writes, “bought a brand-new property in 2013 for $500,000 and decided to rent it out in 2022.” By then, according to the data I’ll describe and analyse in the next section, I estimate that its CPI-adjusted value had increased to $755,000. I’ll assume that the property generated rental income of $37,370 (weekly rent of $725); and like Duong, I’ll also assume that her expenses totaled $24,902 (interest repayments, management fees, rates, etc.).

Notice that Duong explicitly incorporates the cost of interest into his estimate of net income.

“Since Shelly started renting out her property after the 2017 rule changes regarding plant and equipment (Division 40),” Duong continues, “she could not claim depreciation on existing plant and equipment assets. However, she could still claim capital works (Division 43) deductions ... Shelly was eligible to claim $6,900 in depreciation ... during her first year of using the property as an investment.”

Table 3: GAAP’s Impact upon Rental Yield

Table 3 quantifies the impact of non-cash as well as cash expenses upon rental yield. What happens when it incorporates all cash and non-cash costs? It falls considerably – in this example, it halves from 1.7% to 0.8%. What happens to CPI-adjusted yield? During 2022, CPI zoomed 7.8%. Incorporating depreciation, CPI-adjusted net income thus becomes (($5,948 ÷ 1.078) = $5,518, and yield becomes $5,518 ÷ $755,000) = 0.7%.

What, then, is a reasonable estimate of CPI-adjusted rental yield? I’ve noted

1. from Table 2 and Table 3 that cash and non-cash expenses consume a considerable portion of the average RRE investor’s rental income;
2. from the ABS, RBA, REIA and Nigel Stapledon’s research since the 1970s that net – of the cash and non-cash expenses in Table 2 and 3 – rental yields have varied between -1% and 2%;
3. since 1974, CPI has averaged 5.0%.

On these grounds, I conclude that over the past half-century RRE’s CPI-adjusted net rental yield probably hasn’t exceeded 1% – and has certainly been much less than 2%.

The Empirical Reality

Figure 4 plots the total returns (pre-tax) of investments of $100 in the All Ordinaries Index, Australian Commonwealth 10-year bond and Australian residential real estate (RRE) since 1974. The total return of stocks and bonds are easy to calculate because dividends and interest (and thus yields) are readily available. I’ve computed the Ords’ and bonds’ total (capital gain and distributions) return in exactly the same way that Robert Shiller has calculated the Standard & Poor’s 500’s total return in Irrational Exuberance and elsewhere.

Figure 4: Investments of $100 in the All Ordinaries Index, 10-Year Bonds and RRE, CPI-Adjusted, January 1974-July 2024

Each $100 invested in January 1974 in a portfolio which perfectly mimicked the All Ordinaries Index, dividends reinvested and ignoring tax, grew (net of CPI) to $1,925 in July 2024 (the most recent point in the RRE series). That’s a real compound annual growth rate (CAGR) of 6.1%. Each $100 invested in 10-year Australian Commonwealth bonds, coupons reinvested and ignoring tax, grew to $611. That’s a real CAGR of 3.7%.

Unlike any (to my knowledge) other comparison of stocks’ and RRE’s returns, I’ve used the “Real Residential Property Prices for Australia” series compiled by the Bank of International Settlements.

It’s a price – not a total return – index; that is, it records prices but excludes rental income. Hence my generous assumption of a real (CPI-adjusted) net rental yield of 1%: given this assumption and the BIS’s CPI adjusted price series, I’ve computed my estimate of RRE’s total return in exactly the same way that Shiller computes stocks’ and bonds’ total returns. Each $100 invested in January 1974 in RRE, also ignoring tax, grew to $532 in July 2024. That’s a CAGR of 3.4%. Under the highly implausible assumption of a 2% real rental yield, the investment in RRE grew to $1,208. That’s a CAGR of 5.1%.

Both stocks and bonds have outperformed RRE over the past half-century. If anything, Figure 4 understates equities’ advantage over RRE: given dividend imputation, since 1987 stocks’ after-tax outperformance is likely even more marked.

Never mind that I’ve deliberately weighted the scales in favour of RRE: at this point, its proponents are likely squealing: “nobody has the discipline to hold stocks and reinvest their dividends for 50 years! And the series starts in March 1974 – towards the nadir of one of the severest bear markets of the 20^th century. That biases stocks’ 50-year CAGR upwards.”

A significant number of Leithner & Company’s shareholders have been reinvesting their dividends for 20 or more years, but never mind – let’s ascertain Australian stocks’ and ten-year government bonds’ returns relative to RRE’s returns over shorter intervals. In addition to the full dataset (January 1974-July 2024), I’ve also analysed subsets since January 1984, January 1994, ... and January 2014. For each of these subsets, I’ve calculated the three classes of asset’s total returns (CAGRs) for all 25-year, 10-year, five-year and one-year periods. I’ve estimated RRE’s total return at a real yield of 1%. Table 4 summarises the results.

Table 4: Percentage of Intervals in which Bonds’ and Stocks’ Real CAGRs Exceed RRE’s (1% Real Rental Yield), January 1974-July 2024

They’re unequivocal: stocks outperform RRE a strong majority (that is, 60% or more) of the time over all – short-term, medium-term, long-term and very long-term – intervals; bonds outperform RRE a strong majority of the time over intervals of 25 years or more. Moreover, the longer is the interval, the greater is stocks’ tendency to trounce RRE.

Figure 5 encapsulates my results. Measured by very long-term (50-year), CPI-adjusted CAGRs, the All Ordinaries Index (6.1%) outperforms the 10-year Australian Commonwealth bond (4.4%), and the bond outperforms RRE (3.4%). Over short-term (12-month) intervals, stocks (mean return of 8.5%) also outperform bonds (4.5%), and bonds outperform RRE (3.7%). Finally, stocks’ 12-month average return varies most (standard deviation of 18.2%), bonds’ less (10.1%) and RRE’s least (7.0%).

Figure 5: Real CAGRs, Means and Standard Deviations, Three Classes of Asset, January 1974-December 2024

Conclusions and Implications

If I could convey a single message to RRE investors, I’d rephrase Daniel Patrick Moynihan’s famous quip: you have a right to your own opinions, but you don’t have the right to your own facts. The plural of “anecdote” and “opinion” isn’t data; it’s babble and cacophony. But the plural of “fact” is “data” – and valid and reliable data comprehensively refute your anecdotes and opinions.

In short, and to quote that charming ode to homeownership, the movie The Castle, to those who idly claim that Australian “property” produces a competitive long-term return, I retort: “you’re dreamin’.”

From trophy mansions in prestigious areas to modest starter houses in outer suburbs, RRE has long been considered a reliable path to wealth. And in one absolutely crucial sense it has been: the family home is the typical Australian (and American, etc.) household’s single biggest asset. Not surprisingly, Gallup surveys over the past decade have continuously found that a plurality of Americans believe that real estate is the best (that is, better than stocks and bonds, etc.) builder of nest eggs.

But once the family owns its own home, my analysis demonstrates that the utility of additional real estate (“investment property”) becomes doubtful. Australian data over the past half-century are unambiguous: over short, medium and long terms, bonds and especially stocks have usually – and cumulatively greatly – outperformed it.

Hence my (only partly tongue-in-cheek) “solution” to the housing affordability crisis: consider as a thought experiment what might happen if, en masse, “property investors” suddenly realised that the costs of RRE investment are prohibitively high, its returns are unacceptably low – and thus dumped their holdings. The price of RRE would plunge – and thereby become much more affordable for people who aspire to own their own homes.

My results don’t imply that equities are suitable for all people; still less do they suggest that everybody’s holdings should be 100% stocks and 0% everything else! Nor do they mean that everybody should steer clear of RRE:

I’ve emphasised that past and potential future returns shouldn’t be the only factor – and probably not even the primary factor – to consider when choosing investments.

Some people, for example, might like the attributes of RRE and dislike those of stocks; for them, assuming that they do their homework and thus know its relatively unattractive returns, RRE can be a sensible choice. But for those who like relatively safe and stable investments and dislike RRE’s illiquidity, very high transaction and ongoing costs, low yields and returns, etc., Australian Commonwealth or other investment-grade bonds provide a better (much lower cost, much more liquid, much higher yielding and usually higher-return) option than RRE.

To diversify the family’s assets beyond the home, superannuation and share portfolio, in other words, these investors might consider investment-grade bonds rather than “investment property” (see in particular How the 60/40 portfolio outperforms, 17 October 2022).

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