Housing vs. Stocks – a simulation based comparison of resulting real wealth distributions

Abstract

We estimate the distribution of real wealth outcomes from 10- and 20-year investments in self-occupied real estate and broad stock market portfolios, explicitly accounting for typical financing and diversification strategies of private investors. We show that relying only on the first two moments of one-period index returns provides a skewed picture of the risk–return characteristics of both asset classes.

Based on one-period return distributions, stock market investments seem substantially more profitable and less risky than housing investments. When typical cash flow structures and real wealth measures are considered, however, these differences narrow, and housing investments exhibit considerably lower tail risk than stock market investments, irrespective of the financing method.

Keywords: Long term return distribution, equity investment, life-cycle investing