Investing in real estate: is it more profitable than stocks or not?

Introduction

Many experts in the stock market express the belief that investing in real estate is pointless, as the returns on these investments generally lag behind those of stocks and bonds. However, this belief is not entirely accurate, as in the long term, investments in real estate can prove to be not only competitive but even more profitable compared to traditional financial instruments. It is important to note that the real estate market has low liquidity and does not guarantee immediate income, as is the case with stocks or bonds. This article will explore important aspects of this type of asset and provide recommendations for selecting investment tools.

Liquidity of real estate

One of the key drawbacks of investing in real estate is its low liquidity. The process of selling properties in the real estate market can take a long time, sometimes spanning months. In contrast, transactions involving securities can be executed almost instantly. For example, if you urgently need to liquidate your asset and obtain cash, you are faced with a slow and complicated process.

“People who find themselves in a situation where they need to sell their property urgently often face the fact that this process can stretch on for months or even years before a buyer is found,” explains Alexander Prosviryakov, a specialist at a large international investment company. However, for investors focused on real estate, the issue of liquidity is not as critical as it is in the stock market, since such assets are typically held for a long time. Waiting for a deal to close for several months usually does not pose a serious problem.

Transaction costs

When it comes to transaction costs, real estate transactions involve significantly higher expenses compared to stock and bond transactions. According to Alexander Prosviryakov, various associated costs (such as fees for lawyers, realtors, and notaries, as well as interactions with government authorities) can account for 5% to 15% of the total transaction amount when purchasing real estate.

“In securities transactions, costs usually do not exceed 0.2% of the amount, and for large operations, they can be even lower. Additionally, the current costs of maintaining assets vary significantly, and real estate can require substantially more expenses, sometimes by tens or hundreds of times,” the expert notes.

If the main goal of the investor is a quick purchase or sale of real estate, then the commission can significantly influence the decision. However, if the plan is to hold the asset long-term, then the one-time costs will not pose a serious obstacle.

Price dynamics and growth factors

Price dynamics is also an important aspect when making decisions about investing in real estate or financial instruments. It is difficult to definitively determine which of these assets will appreciate in value faster, as over long periods of time, the growth rates of both stocks and real estate can vary significantly depending on the region.

The cost of properties is influenced by many factors, including:

• the economic situation;
• level of demand;
• market offer.

Ultimately, the decision rests with the investor, who must consider their goals, acceptable level of risk, and preferences when choosing the best options for investing their funds. When developing their investment portfolio, it is important to carefully analyze not only the current market conditions but also to make forecasts for the future in order to make an informed decision that can ensure the desired returns.

Analysis of the average annual growth of housing prices and stock indices

The graph presented below shows how average annual housing prices have changed alongside major stock market indices in different countries over the past twenty years. The study used indices such as FTSE 100, DAX, ISEQ, IBEX 35, AEX, US 30, CAC 40, SMI, and OMX.

The data suggests that the returns of both asset categories differ. In some countries, there is a faster increase in housing prices compared to stocks, while in others, the situation is reversed. For example, in the United States, after the real estate crisis of 2007-2008, housing prices have still not reached the levels they were at before the crisis, indicating a slower growth rate compared to stocks.

In contrast, housing in the UK is showing a more significant increase, outpacing local stocks.

On stock indices and their dynamics

It's important to consider that stock indices represent averaged data across many stocks, and individual securities can increase in value more quickly. The same can be said for real estate:

• Some sought-after areas may show significantly higher price growth rates than the national average.
• For example, over the past two decades, real estate in London has shown an average price increase of about 9% per year.
• Across the UK, this figure was only 6%.

In contrast to stocks, it is easier to predict in which regions real estate prices will rise more actively.

Short-term stock profit

Nevertheless, in the short term, stocks can yield more significant profits than real estate, showing much higher growth rates. Some stocks can increase significantly in value in a short period, while such price jumps are virtually unheard of in real estate.

Even stable stocks, like those included in the DJIA (Dow Jones Industrial Average), can show impressive growth rates. For instance, in 2014, the shares of many companies in this index rose by more than 10%, with some recording a growth of 40%.

However, such a rapid increase in housing prices is an extremely rare phenomenon.

Changes in the real estate market during a crisis year

During the 2009 crisis, the real estate market in Europe underwent significant changes, recording an average price drop of 4%. In most countries in the region, this decline did not exceed 10%, according to data from the Organisation for Economic Co-operation and Development (OECD).

While the major stock indices have lost between 40% and 60% of their values compared to the levels before the crisis, the real estate market has proven to be much more resilient. Investors focused on stock assets assure that the risks associated with specific companies or sectors can be minimized through diversification of the investment portfolio.

Real estate, in turn, is considered a more risky area, as it operates within a single market. However, numerous studies indicate that even with a diversified portfolio, investors are not protected from losses during market downturns. As statistical data collected by Yahoo Finance and the OECD show, an index consisting of 100 representatives from various sectors experienced a sharp decline, while real estate values remained relatively stable.

Real estate as a means of preserving capital

Investments in real estate are considered a reliable tool for preserving capital because their value generally increases faster than inflation, which protects the invested funds from depreciation. For example, over the past 25 years, housing prices have, on average, exceeded the inflation rate by approximately 1% per year.

In contrast, stocks and other securities exhibit high volatility and can sometimes grow more slowly than inflation or even significantly lose value. However, over a long period, stocks also tend to rise, but this growth averages about 2% above the inflation rate for the same time frame.

Benefits of real estate

In addition to price increases, real estate provides rental income, which is one of its key advantages.

Stocks, in turn, can offer regular payouts, such as:

• Dividends for shareholders;
• Coupons for bonds.

However, the returns on low-risk securities are often comparable to the returns on real estate, while government bonds typically offer a significantly lower rate. Company stocks do not always provide dividend payments, as many corporations prefer to reinvest their earnings for further business growth.

At the same time, reliable securities with high liquidity often have low dividend yields.

The financial situation in Europe

It is important to note that the results of our analysis are based on data from European countries that are part of the OECD. In calculating the yields of government bonds, we did not include information from Greece, as the country is currently experiencing financial difficulties similar to a default.

As a result, it offers unreasonably high interest rates, reaching 11%, which do not align with overall market trends. As for corporate bonds, the coupon payment rates also remain low.

• According to Business Insider, more than 90% of European companies offer unreliable payments on corporate bonds that do not exceed 2.5% per annum.

As a result, investors need to carefully consider where and how they intend to allocate their capital in order to minimize risks and ensure stable returns.

Conclusion

In conclusion, we can summarize our discussion regarding investments in both real estate and securities. I am convinced that every investor should consider their goals, risk appetite, and time frame when choosing an investment instrument. Although stock market experts emphasize the lower returns of real estate compared to stocks, it is important to note that in the long term, an apartment or house can provide stable income with lower risks.

Liquidity

As practice shows, liquidity is indeed a drawback of real estate; however, for most long-term investors, this is not so critical. The expectation of selling a property should not scare those who intend to enjoy stable passive income for many years. For example, if you plan to hold an asset in your portfolio for 10-15 years, the time spent on selling will not become a burden.

Increase in cost

We also cannot ignore the rise in real estate prices. However, it's important to remember that statistics can vary across different regions and time periods, as we see in some countries like the UK, where property prices are constantly increasing. For a savvy investor, there is always the opportunity to track which locations have growth potential, which is not always as straightforward with stocks.

Final thoughts

Ultimately, I want to emphasize that no investment tool is a panacea. It is important to understand both the advantages and disadvantages of each asset, as well as to be ready to adapt to changing market conditions. Personal risk tolerance and goals are the guiding factors that will ultimately determine what to invest in: real estate or securities.