Real estate
| Real return | Same as public equity |
| Volatility | Public equity + 9% |
| Correlation | 0.7 |
| Testfolio | VGSLX |
| Inflation | Same as public equity |
Publicly listed real estate (REITs) are simply a sector of public equity. As such, it’s higher volatility without expected higher return (uncompensated risk). Although the word “real” suggests inflation hedging properties, there is no evidence that real estate is actually better at this than public equity in general.
Direct real estate
Is investing directly in real estate different than investing in listed real estate? No. Indices like the S&P Case-Shiller home price index are just lagged, smoothed REITs. And individual homes add huge idiosyncratic risk.
Practical consideration
You need somewhere to live, as such you are naturally short a house. If you want to live in a specific location then the only way to hedge it is to buy a house there, or to have a long-term lease.
Direct real estate and occupant owned real estate have two special advantages:
- Taxes can be lower than owning other kinds of assets.
- Mortgages are a form of leverage that is not callable even if the price of the real estate goes down and you are underwater. Mortgages are based on your (potential) human capital.