Residential real estate in large cities is considered particularly profitable.
However, yields over the past 150 years have been lower on average than properties in small towns. This is shown by a study by the team of economist Prof. dr.
The researchers assessed data on house prices and rents from 27 selected major cities in 15 countries. In the first step, the team calculated the average total return of urban residential properties over the past 150 years, which includes house price growth and rental income. In addition to existing databases, the researchers used municipal directories, newspaper advertisements, tax and notarial records as a reference base. Economists then compared yields in major cities with average yields in the rest of the country. In addition to international metropolises such as
The result: residential real estate in the major cities studied has generated on average about 1% less total return per year over the past 150 years than the rest of the country. This effect is also evident when looking at shorter time periods, such as the last 70 or 30 years. “If you had invested in a national portfolio of residential real estate in 1950, it would be worth twice as much today as an equivalent portfolio in a major city,” says
Rental income is crucial for high property returns
The study concludes that the key driver of high returns is rental income, which has remained relatively constant. “House prices have sometimes gone up more, but they have also fluctuated more,” says Schularick. Overall, rental income has accounted for nearly 70% of total residential real estate returns over the past 150 years. In relation to the purchase price, rents are on average higher outside urban areas.
Risk premium on rural residential real estate
The researchers also explain the fact that residential real estate outside major cities yields higher long-term returns with the increased risk that investors in smaller cities take. Real estate in larger cities is more liquid, which means it has a greater likelihood of being sold at some point. Meanwhile, in smaller towns, it can be more difficult to sell a property quickly.
The study dispels the prejudice that real estate investment is more attractive in large cities. “Even big investors are turning to investing in rental properties in small towns,” said Leibniz Prize winner Schularick.
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