Retirement Plans

There is one reason why the average person should use stocks rather than real estate as his or her principal retirement investment: inflation. Historical data indicates that the stock market provides far more protection from inflation than real estate does.

Inflation can have two terrible effects on real estate that investors need to be aware of. The first is to create the illusion that real estate values are far greater than they actually are. A classic example of this is currently occurring in the United States housing market, where headlines are trumpeting that the average home price is approaching the highest level seen since 2006 at the peak of the Great American Real Estate Bubble: $230,400, or €208,555.86.

The average home price was $228,700 (€207,017.40) in May 2015, according to the National Association of Realtors. The problem is that assessment is incorrect when inflation is taken into consideration.

The 2006 average home price of $230,400 equals $271,777.14 (€246,010.05) in 2015 currency, according to the CPI Inflation Calculator provided by the United States Bureau of Labor Statistics. The average home price would have to rise to around $272,000 (€246,211.78) for an American that purchased a home in 2006 to cover the initial investment cost.

In comparison, $230,400 invested in the Standard & Poor’s (S&P) 500, the most popular American stock index, in 2006 would have been worth $389,296.06 (€352,387.04) in 2013, according to’s historical returns investing calculator. Not only did the stock investment beat inflation but it earned over $100,000 more during a period that saw one of the biggest bull markets in stocks in recent history. It should be noted here that the final stock value could be much higher because the calculator only estimates returns until 2013.

The High Cost of Home Ownership

The other effect inflation has on real estate investment is the cost of real estate ownership. Stocks only generate additional expenses when they are bought and sold or taxed. Real estate, as all property owners know, costs money to own.

The cost of simply owning the average home in the United States is around $9,477 (€8578.49) a year, the American website Zillow calculated. These costs are in addition to the expenses of actually purchasing the home and financing the expense through a mortgage. The additional expenses included property taxes, maintenance and insurance. These prices go up every year with inflation and do not include utility costs, which are also subject to market forces.

The American who purchased a home in 2006 would have to deduct $85,293 (€77,206.40) for the other costs from his or her income between 2006 and 2015. Not only would a person that purchased a U.S. home as an investment in 2006 still be underwater but he or she would be out another $85,293 (€77,206.40) in maintenance costs.

This also means that the homeowner would have to sell the home for $357,293 (€323,418.18) to break even on the investment. An individual banking on that money for retirement had better plan to keep working for a few more years.

Stocks versus Real Estate in Europe

The actual return on investment from real estate investment in the United States—a country where the government goes out of its way to encourage home ownership and inflate real estate values—is terrible. So what is the return on investment in real estate in Europe?

Not surprisingly, it varies widely from country to country on the other side of the pond. The real value of the average house in Germany was 10% lower in 2012 than it was in 1982, Forbes contributor Eamonn Fingleton pointed out. This trend has been reversed slightly in recent years; house prices in Germany increased by 11.2% in September 2014 but only increased by 1.9% or .6% in real terms in April 2015, according to the German Property Guide.

It is difficult to find data on the average price of a home in Germany because only around 43% of the people in that country own their housing, largely because there is little benefit to owning a home, although Fingleton estimated that a four-bedroom home in the Rhineland sold for around $80,000 (€72,415.23) in 2012.

In contrast, the main German stock index, the DAX, increased from $1,443.20 (€1,306.37) on Nov. 26, 1990, to $11,058.39 (€10,009.95) on July 3, 2015, according to Yahoo Finance. A German that invested in a house in 1990 would have seen his investment fall by 10%; a German that invested in DAX could have seen his investment grow by more than 100%.

Interestingly enough, there was at least one country in Europe where real estate price growth exceeded that of stocks: Great Britain.

The average house price in the United Kingdom increased by 233% between 1982 and 2012, British real estate consultant Colin Wiles noted. Despite that average home prices in the United Kingdom varied widely, the house in London cost around £500,000 (€705,126.24), while the average home in the country’s northeast region cost £150,000, (€211,153.79), according to the Independent. The average home in the United Kingdom cost around £272,000 (€353,588.67)

The FTSE, the main British stock index, went from £1,413 (€1,992.69) in 1985 to £6556 (€9,245.62) in 2014, according to Swanlow Park. British stock values increases were in line with those in Germany, but British real estate price growth greatly exceeded the growth in stock values.

The reason for the difference in home prices between the two nations is that Germany actively encourages home construction and discourages real estate investment, while Britain discourages construction and encourages investment, Wiles noted.

What this means is that real estate can be a better investment than stocks if you buy the right property in the right place at the right time. The value of real estate is completely inconsistent and at the mercy of government policy as well as inflation. Stocks showed a consistent level of growth that beat inflation in all the countries we surveyed, while real estate did not.

Stocks are still a superior retirement investment, even in Britain, because the price of entry to the market is much lower. The cost of staying in the market is also lower because of lower expenses. If you are looking for a lower cost investment that beats inflation and helps secure your retirement, you will need to put your money in the stock market.


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