They find that, in the average wealthy country, the annual return on housing during that period was just over 7% when adjusted for inflation, while the return on equities was just under 7%. At the same time, the risk associated with housing was far lower. By standard measures of uncertainty, housing was about half as risky as equities and slightly less risky than bonds.
The reason these findings are so remarkable is that they fly in the face of economic theories of asset valuation, which suggest risky assets like stocks should have higher returns than stable ones like housing. But that’s not so, the authors write. The ultimate investor, according to the study, would actually hold “an internationally diversified portfolio of real estate holdings, even more so than equities.” The economists do not offer an explanation for their findings but hope other researchers will use their data to try to solve the puzzle.
Although housing performed better than equities overall, there were large differences across the 16 countries included. At 3.3%, the extra return you would have gotten on housing compared to equity investment was largest in France, where equity investments were particularly low due to the devastation of World War II, a wave of nationalizations of private businesses after that war, and an oil crisis in the 1960s.