Is Real-Estate Really a Good Investment?
Why owning property can be more of a burden than a boon
While some people hold the view that real estate investments in Japan are a bad investment, the same is often true for hotter real estate markets, such as the United States.
In fact, recent increases in housing loans and falling real estate prices have sparked up the age old discussions that housing prices in the US only slightly outpace inflation over time.
When considering the real return on real estate investments, it is helpful to think of a house as two separate pieces: the land and the actual house itself. The land is likely to appreciate in value over time, making it a solid investment. The house, on the other hand, is a depreciating asset that is guaranteed to fall apart, much like a car. Any intangible “investment” components of a house are subjective and not necessarily financial, and this is true both in Japan and the US.
Robert J. Shiller, Economist at Yale University has done extensive work on the American real estate market (Shiller et al., 2006, Brinkerhoff & Alman, 2015). When looking at the average annualized return for housing in the United States since 1890, it has only gone up by 3.2%. This number is slightly higher since 1960 at 4.2%, and a bit better since 1970 (4.8%), and more in line with the historical average since 1980 (3.8%).
However, when taking inflation into account, housing prices in the US have only slightly outpaced inflation over time (inflation has historically averaged about 3.2%). Compare this to the average return for the S&P 500 index over the past 70 years 10.58%, and you get to see how bad real-estate investments have actually performed.

Like all financial asset purchases, there are always costs associated with purchasing real estate. Real estate fees are often higher and less flexible than other investment vehicles, and the costs arise in ways that are even better disguised than a bulge bracket brokerage statement.
For example, when purchasing a home, you are guaranteed to start your purchase in the red by the amount of the fees involved in purchasing the asset. Realtor commissions, closing costs, inspection, appraisal, insurance, and a whole slew of other potential costs, such as moving or maintenance, all add up. This is before you’ve even stepped foot into your “investment” and before you’ve started paying the real fees, such as your mortgage, which will cost you almost 75% of the cost of the home over the life of a 30-year mortgage and the maintenance.
Let’s take an example of a home worth $200,000 and assume some relatively modest up-front costs, such as commissions, closing costs, and inspection. Let’s also assume a fixed-rate 30-year mortgage at 5.5%, which is fairly conservative these days. The total costs come out to about 5.25% of the cost of the house, similar to buying an A-share mutual fund.
Over the life of a home, you will have to pay taxes, mortgage payments, property insurance, utilities, water, disposal, and routine maintenance. These are all fixed costs, and whether you rent or buy, you’ll have to pay some of these fees no matter what. According to the 2009 American Housing Survey, these costs come out to about 7-8% of the value of the home per year. The mortgage cost includes principal payments, so let’s assume that the 30-year mortgage will cost you roughly $165,000 over the life of the mortgage (this is JUST the interest paid). Using a basic amortization schedule, it’s safe to assume a monthly interest payment of $800 or $9,600 per year.
Don’t abandon your home-owning dreams just yet
Don't worry, this post isn't meant to burst your dreams of owning a home.
It's important to keep in mind that buying real estate is not necessarily a bad idea, as you have to live somewhere. However, the specifics of buying a place outright, buying with a mortgage, or using the property as an income source will affect the costs and returns of your investment. The analysis presented here simply aims to provide a realistic perspective for those of us who buy a house with a mortgage and live in it, as this is the case for most people.
Personally, I believe that buying a home can be a less expensive way to live than renting IF you intend to stay in the place for the long haul, but this may vary depending on where you live. Owning your own home also comes with numerous tangible and intangible benefits that make it a wise purchase, such as tax benefits and a place to call your own. However, it's important to avoid thinking of housing as an amazing investment.
Also, it is important to note that for people who have managed to time the market, like buying real estate in slumps like 2009 and selling it during Covid, have made really amazing returns. Sadly, most people who have done the same timing for stocks have notably gotten even better returns.
Whether you rent or buy, you will be experiencing an expense. The real costs of that expense will depend on your specific situation, including the location and the type of property you choose. But when it comes to real returns and real, real returns (which include taxes, fees and the cost of abstaining from other investments), the returns are unlikely to be significant. Therefore, buying real estate in the US or Japan should be seen as a lifestyle choice rather than a guaranteed financial investment.
Great take and agree! Obviously, it also comes down to your own personal circumstances and where you are in the world but as a general rule of thumb, yes.
In the real estate debate it's worth including consideration of leverage and market specifics.
Average folk use leverage when buying a property. Eg 100K investment for a 500K property. If the property goes up (or down) by 5%, the return (or loss) is equal to 25% on the downpayment investment. Average folk wont invest with leverage outside of real estate. In this way it's not an apples to apples comparison. If it's a rental unit and the property cashflows, then the 100K investment can grow both by loan pay down (by tenant) and by property appreciation.
Also real estate is very market specific. In Japan, you can forget about much land appreciation outside of Tokyo; versus places like Vancouver, where it can double every 7 to 10 yrs; and decaying centers where it can halve its value in the same time frame. Same investment. Different markets. Totally different outcomes.