Is Real Estate a Good Investment? IV

In the businessman point of view, the rate of return is crucial to determine whether he wants to make the investment or not. In the equity market, people use Price Earnings (P/E) ratio as a reference for the investment. Take an example, if P/E of stock ABC is 5, this means he needs 5 years to get back his initial investment and this translates 20% annual return rate. While for stock XYZ where the P/E is 20, this means investors of XYZ company need to wait for 20 years to get back his initial investment and this translate to 5% annual return rate. That's the reason a savvy investors always tell you that, whether you make a good investment is not when you sold it, but when you buy it.

As we can see from the graph where a ratio of house prices to rents (P/R), which is equivalent to equity P/E ratio, the ratio was 100 in between 1975 - 2000. But the trend moved to north exponentially after 2000 when the Dot com bubble burst, this trend more prevail in Australia and Britain. Australia registered a ratio around 170, Britain 155 and US 135 in 2004. What is it means? The ratio of 170 means the price of real estate in Australia in 2004 is either 70% higher if compare to the average price for the period of 1975 - 2000 or the rental is 70% lower for the mentioned period. If you deduct all the related expenses for real estate such as management fee, broker fee, insurance charge and so forth, the ratio could be higher.

While people could argue that we could not compare real estate investment with equities because real estate is "REAL", it is not a paper value. True, real estate is "Real" in physical but the illusion of control could harm the judgment of the investors. For every investment decision made, we could not run from the reality of the rate of return, no matter it is in equities, bond, real estate, commodities market...etc.

Any indication for you?