With the ongoing reports of Indian real estate caught in a slump, you may be thinking that it no more a preferable avenue to put your investment. Financial experts and planner also might you nowadays to better stay away from real estate and instead invest in financial assets (stocks and bonds), which are likely to fetch you better returns over the long run. It is a common perception that equities typically outperform most asset classes across markets. However, it may NOT be universally true.
According to a new path-breaking study of historical asset prices– Jordà-Schularick-Taylor Macrohistory Database funded by the Institute for New Economic Thinking (INET), it is residential real estate, not equity, has been the best long-run safer investment over the course of modern history.
The findings of the research suggest that returns on housing and equities have been similar in the long-run, housing has been much less volatile. Hence, risk-adjusted returns from housing has been better over the long run than equities.
Returns in housing includes both price changes and the rental income or dividend earned on investment. Having said that, one should be aware that this does not mean that house prices never fall. Resonating the overall state of economy, housing sector is also prone to slumps.
The research highlights another interesting finding that globally, housing price movements have a strong correlation with overall credit growth in the economy. If credit is easily available in the market, a lot of the money ends up in real estate, boosting house prices. On the other hand, slow credit movement often lead to dip in the property prices.
Point to be noted here is the new database unfortunately does not include data on India, for which reliable long-run data on house prices is hard to come by. However, home prices available from around 2010 onwards do suggest that housing price movements have indeed been less volatile than equities.
While the typical Indian mentality to investing one’s wealth in land and property seems to be more emotional than a rational one, the new data suggests otherwise.
More property tips and trends here.