Over the past decade, investment in real estate has yielded a higher return than investment in the capital market, according to a study by the Bank of Israel. On a thirty-year comparison, however, investment in stocks leads, the study finds.
The study compares the average gross and net returns on investment in residential real estate, stocks, and government bonds over the past three decades (1988-2017).
The average annual return on investment in stocks over the period, using the Tel Aviv 125 Index as a benchmark, is 7.59% gross and 6.06% net.
The average annual return on investment in a residential apartment over the same period is 5.76% gross and 4.87% net, while for government bonds the figures are 3.48% gross and 2.66% net.
The advantage of investment in stocks remains after the costs of investment in the different assets, including taxation, are taken into account. The Bank of Israel's study does not, however, take into account the high leverage taken by investors in apartments, enabling them to raise their return on capital substantially, thanks to low interest rates.
The Bank of Israel stresses that in any comparison between the different kinds of investment, the investment period is critical. "If we examine the returns on investments starting from the beginning of 2007, just before the global financial crisis, we find that investment in a residential apartment bore the highest return among the different options," the report states.
In addition, there are other clear differences between these assets, for example because of the heavier taxation imposed on gains on stocks. Profits from rents on apartments are taxed at only 10%, and the first NIS 5,000 monthly is tax free. "It emerges that costs of investment have eroded investment in stocks much more, whereas investments in government bonds and in housing have been eroded less."
With investment in housing, the longer the investment period, the less the effect of transaction costs and taxation. With investment in stocks, the time period is less consequential for the net return.
Published by Globes [online], Israel business news - www.globes-online.com - on January 15, 2018
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