Ben Felix - Housing: The Best Investment In History (On Paper)

Short Summary

Main recommendation: Do not treat direct housing investment as an easy substitute for a diversified stock and bond portfolio; the strong historical real estate returns are hard for an individual to capture. Ben Felix argues that housing's high historical returns depend on global diversification and property management that most individual investors cannot practically achieve, so a low-cost index fund approach to gain similar factor exposure is more cost-effective and reliable.

Key Points

• Housing has historically been the best-performing asset class: a 1870–2015 study found a 7.05% mean real global housing return versus 6.89% for equities, with lower volatility, but this return includes rental income and price appreciation, each about half the total.
• Buying a home to live in forgoes the net rental income portion, so the historical housing returns come from owning and renting out property, not from owning a primary residence.
• The global housing return only held when investing across all 16 countries in the study; investing in housing in any single one of nine listed countries (including the US and UK) would have underperformed global stocks.
• Real estate is hard to diversify: high unit values, indivisible assets, and the need to manage properties (maintenance, tenants, leases, rent collection) make broad ownership impractical, and property management fees reduce returns.
• In the Ottawa example, the modeled rental property, projected over 25 years, had an average annual return of 7.29% pre-tax, identical to a globally diversified index portfolio's 7.29% return for the 20-year period ending March 31, 2018, but that projection rests on optimistic assumptions and single-property risk is largely uncompensated.
• A 2018 factor study by Peter Ladina found real estate returns can largely be explained by stock and bond factors (market, size, value, term, default), so adding real estate does not necessarily provide exposure unavailable through traditional stocks and bonds.

Details Worth Noting

• Concrete instructions: To estimate a rental property's return in the Ottawa example, the speaker assumed a 2017 average home price of $378,000, a 20% down payment of $75,600, a $4,000 land transfer tax, and $2,000 closing costs (total initial investment $81,600); a 3.09% 25-year mortgage costing $1,448/month; property taxes at 1% of value per year; maintenance at 1% of starting value, rising with inflation; and rent of $1,650/month (versus a $1,568 2017 average) with 2% annual rent growth and 3% annual asset growth.
• Under the same assumptions, one month of vacancy every two years cut the average annual return to 6.4%, and rent of $1,568 instead of $1,650 cut it to 6.03%, showing sensitivity to vacancy and rent.
• The example assumes the mortgage rate stays at 3.09% for 25 years; higher interest rates could hurt returns, and all figures are pre-tax.
• For single-property risk, the speaker notes that a concentrated investment can succeed (such as a Toronto detached home bought a decade earlier) but he would not rely on that outcome repeating.
• The speaker's comparison used a globally diversified index portfolio return of 7.29% per year for the 20 years ending March 31, 2018, and he references a separate video titled 'How Much Risk Should You Take?' on idiosyncratic risk.

Bottom Line

Housing's strong historical returns are real but largely unavailable to an individual holding one or a few properties, so the practical lesson is to seek similar factor exposure through low-cost, globally diversified stock and bond index funds instead.