Our world has an extraordinarily materialistic outlook—at least, this holds perfectly true for the regions considered part of Western civilization. By nature, human beings love to collect, possess, and are obsessed with shiny technological innovations, not to mention glittering gemstones and precious metals. Human civilizations have always been fundamentally defined by their structures; even today, it is the surviving buildings and ruins that tell us the story of the lives and worlds of people from the distant past. In modern times, our residence—whether owned or rented—remains at the center of our lives. Yet, some view real estate not merely as a place to live, but as an investment opportunity (or as a haven to park funds originating from questionable sources). Wealthy social strata are fond of accumulating properties, which in many cases they do not even utilize—they neither rent them out nor use them personally; they simply park their capital there and wait for its value to appreciate over many years. However, this fad bleeds down into lower social groups as well, who naturally finance such investments through debt. We witnessed this in the first half of the 2000s and during the exceptionally low-interest-rate environment of the 2010s.

The fundamental belief that real estate is always a good investment becomes a particularly pervasive cliché after years of witnessing significant price increases, leading society to forget past market crashes. Incidentally, this is true for any investment asset. In the 2010s, lower property prices following the 2008 crisis combined with low interest rates steered investors away from the bond market and heavily toward real estate. An uninformed, conservative investor trusts real estate second only to bonds, as its price cannot be tracked on a daily fluctuating basis, and it is tangible—right there in front of them. However, every rise must eventually come to an end, a trend already visible globally, but perhaps most acutely in Western countries: real estate prices have climbed to levels where achievable yield levels have compressed. Meanwhile, bond yields are rising; the yield on the U.S. 10-year Treasury note crossed above 5% a few days ago. Thus, the bond market is becoming more attractive. This trend did not start yesterday—investors have been selling real estate, price levels have been stagnating, and bond yields have been rising for years now. Frankly, it is no bad thing that interest rates are climbing to meaningful levels again; capital ought to have a cost. Unwarrantedly low financing costs and endless money printing are precisely what left developed nations sitting on mountains of debt today. It is no wonder the market now demands a higher return on its committed capital, as available money is far scarcer than the demand for it. Naturally, this will lead governments sooner or later to stoke higher inflation again through money printing, as this remains a conventional tool for financing their debt. However, we likely will not return to the levels seen during the 2010s or the COVID era, as doing so would almost certainly cause yields to spike and trigger a crash (though this could still happen, as prudence and long-term vision are traits few governments possess).

Returning to real estate, over the coming decade, investing in property will likely prove less appealing to those seeking capital gains. Illicit and gray market funds will undoubtedly continue to flow into the sector, but the motivations in those cases differ, and in terms of magnitude, it is unlikely to drive prices up significantly the way it did over the past decade. In his book A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, Ben Carlson includes a brief chapter on real estate investing where he explains that the real value of residential property naturally depreciates over time due to wear and tear, unless owners reinvest a portion of their income into maintenance and renovations. Thus, real value can only be sustained by injecting additional capital—a dynamic that does not apply to equities. According to the Case-Shiller Home Price Index, the U.S. housing market generated an annual return of 3.8% between 1930 and 2013—barely outpacing the average inflation rate of 3.5% over the same period. Then, of course, there are the incidental costs: taxes, maintenance, mortgage interest, insurance, transaction fees, broker commissions, and so forth. Factoring in these expenses—which most people ignore when praising the performance of the real estate market—leaves an investor breaking even at best. From the 1990s through 2013, the appreciation of the Case-Shiller index amounted to just 3.2% annually. Real Estate Investment Trust (REIT) stocks, by contrast, rose by over 10% annually during that same period. As a side note, a similar relationship and yield spread can be observed between gold itself and gold mining equities.

I am not suggesting that buying a personal home is a bad idea—it has its place. However, putting your entire wealth into a single asset is extremely risky. From an investor’s perspective, diversifying into real estate may make sense for larger fortunes, but even then, only a small fraction of one’s total portfolio should be allocated to it. For retail investors, the stock market comes to the fore once again: if real estate is desired, REITs are the way to go, offering lower volatility relative to the broader stock market alongside higher dividend yield potential.