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Real Estate Returns Are Lower Than You Think

Published on:
Updated on:
March 11th, 2021

National trends for housing data over the last decades seem to indicate that housing prices climb steadily. Even during the pandemic, certain real estate markets are showing record prices. Yet a new study, with unusual access to minute detail, indicates that over the long term, real estate as an investment is decidedly lukewarm.

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Houses in London ©I-Wei-Huang on Adobe Stock 


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Amid a pandemic, people are fleeing cities to seek less congestion and more space to work at home. Low interest rates are encouraging a home-buying trend — and some markets are experiencing record prices. Even with high unemployment, American home prices rose at the fastest rate ever, jumping 14.9% in the fourth quarter of 2020. The United Kingdom posted the highest annual growth rate for home prices in six years, surging 8.5% from the previous year.

When you also consider housing data from the past 30 to 40 years, which seems to plot unwavering price increases over recent decades, you would think that real estate investment would be very lucrative indeed. But in fact, my coauthors, David Chambers and Eva Steiner, and I came to the surprising conclusion that real estate — and housing in particular — is less profitable over the long term than previously thought.

A very precise study of historical real estate investors

We studied the real estate investments of two Cambridge and two Oxford colleges, which have been important property investors for centuries. Over most of the period we studied, 1901 to 1983, the colleges’ endowment consisted almost exclusively of real estate, only to diversify later in the century. Even today, their real estate holdings represent 40% of their portfolio. (Compare this, for example, to Harvard’s endowment, which invests only about 7.1% of its $42 billion endowment in real estate.)

The advantages of using the archives of the Oxbridge colleges were many, including the diverse and multiple holdings the colleges had: agricultural, residential and commercial properties throughout the UK. But particularly valuable were the granular details on individual properties. 

We were able to examine purchase and sale costs, as well as rental income and maintenance costs for individual properties. A ledger entry from 1926, for example, indicated costs for an ironmonger, carpenter, mason and smith on a farm property. We were also able to see if, for instance, actual rent collected differed from what was specified in the lease.

Improving on previous research: tracking specific properties over time

Traditional research in the field must usually rely on market averages, because specific details on individual properties are hard to find. However, individual properties can vary significantly from market averages, so the ability to track specific properties over time was highly beneficial to our understanding. 

On completion of our research, most surprising to us was that average income growth and price growth for all property types over time were close to zero, which was markedly different from previous understanding. Over the years 1941 to 1960, for instance, we found an annualized real income growth rate of -0.7% compared to +3.7% cited in other recent research on residential real estate for the same geographical region and time period.


Most surprising to us was that average income growth and price growth for all property types over time were close to zero.


Also important among our findings was that the net annual return on housing (capital gain plus income yield minus costs) was a strikingly low 2.3% after correcting for inflation — substantially less than another, often-cited figure. We found agricultural and commercial property to have slightly higher average returns than housing.

Does Oxbridge represent the market?

It is legitimate to wonder if the results drawn from these four Oxbridge colleges are representative of the institutional investors in that market. Perhaps these colleges made particularly bad investment choices or had particularly bad tenants.

However, it is clear from our data that the colleges had geographically diverse portfolios that were professionally managed. The bursars were advised both by alumni with relevant finance and real estate experience and by specialist estate agents. Even today, the Oxbridge endowments remain among the biggest real estate investors in the UK. We have no indication that these were low-quality investments and have clear signs that the endowments were being managed in pursuit of long-term investment returns.

Therefore, both institutional and individual investors should be aware that, when you take the long view, the investment performance of real estate assets may be much less attractive than is commonly thought. We found this to be true in the UK real estate market, but we might expect similar results in other regions or countries with similar market forces at play. 



For institutional investors, real estate can play a role in a diversified investment portfolio, but its long-run returns shouldn’t be overestimated. Commercial real estate may have a more favorable risk-return trade-off than residential real estate. Individual investors should keep in mind that the strong price increases seen over recent decades are exceptional from a historical perspective and ownership of one property is more hazardous than owning a portfolio of dozens or hundreds of properties, where risk is attenuated.


We examined the real estate archives of King’s College and Trinity College, Cambridge, and Christ Church and New College, Oxford, covering the period from 1901 to 1983. We combined the data from transaction ledgers on purchases and sales with that of ledgers on rents and maintenance costs. We tracked the same properties over time, to calculate income growth, price growth and net yields.
Based on an interview with Christophe Spaenjers and his article “The Rate of Return on Real Estate: Long-Run Micro-Level Evidence” (The Review of Financial Studies, forthcoming), co-written with David Chambers and Eva Steiner.  

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