The Total Return and Risk to Residential Real Estate

Piet Eichholtz, Matthijs Korevaar, Thies Lindenthal and Ronan Tallec† November 12, 2020 Abstract We estimate total returns to rental housing by studying over 170,000 handcollected archival observations of prices and rents for individual houses in Paris (1809–1943) and Amsterdam (1900–1979). The annualized real total return, net of costs and taxes, is 4.0% for Paris and 4.8% for Amsterdam, and entirely comes from rental yields. Our returns correlate weakly with the implied returns in Jorda et al. (2019) and are substantially lower. At the property level, yields are persistent over time, even for long holding periods, so that yield risk becomes an increasingly important component of property-level risk for longer investment horizons.

We find total net geometric returns to rental housing of 6.3% for Paris and 8.0% for Amsterdam, with index-level standard deviations of 8.6% and 10.3%, respectively. In real terms, geometric average returns amount to 4.0% per annum in Paris and 4.8% in Amsterdam. These returns are significantly lower than reported in Jorda et al. (2019a) and result in approximately 40 percent lower Sharpe ratios, closing most of the gap with equities that Jorda et al. (2019a) document. This gap further reduces after accounting for transaction costs and idiosyncratic risk. The long-term real return to housing can entirely be attributed to the rental yield, with real capital gains around zero. We find that our series of net rental yields are uncorrelated to the implied yield series in Jord`a et al. (2019a), showing that it is very difficult to accurately estimate long-term yields from secondary data