The Total Return and Risk to Residential Real Estate

Abstract

This paper aims to determine the total rate of return to residential real estate. It employs hand-collected archival data for Paris (1809–1942) and Amsterdam (1900– 1979), combining microdata on rents, transaction prices and assessed values for the same homes, as well as information about taxes and costs. In all, we collected 131,711 observations of rents, prices or taxes, covering 26,211 properties. We find real total returns to housing, net of costs and taxes, of 4.9 percent per year for Paris and 5.3 percent for Amsterdam. Importantly, our annual returns correlate only weakly with the housing returns estimated in Jordà et al. (2019), and result in 35 percent lower Sharpe ratios than previously suggested. When housing returns are measured correctly – quality-adjusted, with actual yields observed from rents and prices for the same assets property-level, and property-level taxes and costs included – it seems that much evidence of a housing risk premium puzzle disappears.

Housing Markets in a Pandemic: Evidence from Historical Outbreaks

“…For Paris, we use data from Eichholtz et al (2021) originating from the sommier foncier , a government register containing information on the universe of sale prices in Paris between 1809-1943. In total, we draw on a sample of 39,786 sales prices, covering 17,300 properties.…”

Empirical evidence on the ownership and liquidity of real estate tokens

“…17 Our sample period is too short to provide valid conclusions about the expected return of investing in these tokens. As price seems to be related to economic fundamentals, its long-term returns may be similar to that of other residential real estate Eichholtz et al (2021). estimate the real return of residential real estate to be close to 5% per annum.…”

“…As price seems to be related to economic fundamentals, its long-term returns may be similar to that of other residential real estate. Eichholtz et al ( 2021 ) estimate the real return of residential real estate to be close to 5% per annum.…”

Dynastic Home Equity

“…In the last part of the paper, we present back-of-the-envelope calculations of the effect of parental equity extraction on their children's wealth accumulation to give a sense of the economic importance of the dynastic home equity channel. To perform the calculation, we combine the historical real returns on housing wealth from the literature (Flavin and Yamashita (2002), Eichholtz, Korevaar, Lindenthal and Tallec (2021), and Chambers, Spaenjers and Steiner (2019)) with our new estimates of the effect of parents homeownership and equity extraction on children homeownership. Using the estimated transition probabilities of children into homeownership, we compute the fraction of homeowners by age 30 and their housing wealth.…”

“…An important input into any calculation of this type is the typical returns to housing wealth. Estimates of this return vary substantially across time and countries, withFlavin and Yamashita (2002) providing an estimate of the real, net return of about 6.6% in the US, butEichholtz et al (2021) andChambers et al (2019) both provide detailed, long-run estimates of about 4% based on micro data in Europe. We provide a range of calculations using these two estimates.…”