The Total Return and Risk to Residential

Real Estate
Piet Eichholtz
Maastricht University

Matthijs Korevaar
Erasmus University Rotterdam

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Thies Lindenthal
University of Cambridge

Ronan Tallec
Université Paris 2 Panthéon-Assas

We estimate total returns to rental housing by studying over 170,000 hand-collected archival
observations of prices and rents for individual houses in Paris (1809–1943) and Amsterdam
(1900–1979). The annualized real total return, net of costs and taxes, is 4.0% for Paris and
4.8% for Amsterdam and entirely comes from rental yields. Our returns weakly correlate
with the implied returns in Jordà et al. (2019) and are substantially lower. We decompose
total return risk at the individual asset level and find that yield risk becomes an increasingly
important component of property-level risk for longer investment horizons. (JEL G11,
G12, N20, R30)

Received February 29, 2020; editorial decision January 21, 2021 by Editor Stijn Van
Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the
Oxford University Press Web site next to the link to the final published paper online.

Housing is the world’s largest asset class, but with some exceptions, it did
not have much institutional investor interest in the decades before the Great
Recession. Since then, however, housing markets all over the world have been

We thank the staffs of the Paris and Amsterdam city archives for smoothly dealing with our incessant requests for
archival materials. Furthermore, we thank Bruno Deffains and Will Goetzmann for their encouragement and two
anonymous referees, Anne Alonzo, Jacques Friggit, Dmitry Kuvshinov, Gilles Postel-Vinay, Sébastien Pouget,
Jean-Laurent Rosenthal, Carolin Schmidt, Christophe Spaenjers, Stijn van Nieuwerburgh (editor), and Michael
Visser for their helpful comments. The Netherlands Organization for Scientific Research funded Korevaar under
the Research Talent scheme [grant no. 406.16.552]. A Cambridge Humanities Research Grant and a Lincoln
Institute Dissertation Fellowship funded part of the data collection for this paper. Supplementary data can be found
on The Review of Financial Studies web site. Send correspondence to Matthijs Korevaar, [email protected].

The Review of Financial Studies 34 (2021) 3608–3646

© The Author(s) 2021. Published by Oxford University Press.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License
(http://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction
in any medium, provided the original work is properly cited.
doi:10.1093/rfs/hhab042 Advance Access publication April 12, 2021

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 The Total Return and Risk to Residential Real Estate

booming, and so has investor interest. Both private and institutional investors are
putting capital into rental housing (Bracke 2021; Mills, Molloy, and Zarutskie
2019). No doubt, their interest has been spurred by the recent performance of
housing markets, with high levels of house price growth observed across the
globe in the past few decades (Knoll, Schularick, and Steger 2017).
In a recent paper, Jordà et al. (2019) aim to determine the total rate of return
to housing and to compare it to the performance of stocks and bonds all over the
world. Their results—based on secondary data sources—suggest that housing
returns are surprisingly high given their risk. Indeed, in a follow-up paper, Jordà
et al. (2019) point out an unsolved risk premium puzzle for housing investments.
However, the housing returns data on which these papers are based suffer
from several measurement problems, which led to a debate on whether the

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reported high returns to housing are real, or the result of mismeasurement
(Chambers, Spaenjers, and Steiner 2021; Eisfeldt and Demers 2018; Dimson,
Marsh, and Staunton 2018). The main aim of our paper is to shed light on this
issue.
The crucial piece of information that is typically lacking in studies that aim
to compute long-term housing returns and risk, both at the aggregate and at
the individual levels, is an accurate assessment of the rental yield. Early papers
aiming to assess the total return to housing used an imputed rent (Flavin and
Yamashita 2002) or based it on national accounts data (Piazzesi, Schneider,
and Tuzel 2007). More recently, the common approach to deal with this issue
is to estimate yields based on actual house price and rental series, but these
tend to pertain to different housing market segments (e.g., Brounen et al. 2014;
Eisfeldt and Demers 2018; Giglio et al. 2018; Jordà et al. 2019).
This issue goes beyond measuring housing returns themselves. Without data
on actual yields, the use of implied rent-price ratios or rental returns has been
standard in much of the literature on housing markets (e.g., Himmelberg, Mayer,
and Sinai 2005; Sinai and Souleles 2005; Campbell et al. 2009; Ambrose,
Eichholtz, and Lindenthal 2013; Sommer, Sullivan, and Verbrugge 2013;
Favilukis, Ludvigson, and Van Nieuwerburgh 2017). Our paper overcomes
this hiatus, and our first main contribution is to calculate total returns and risks
to residential real estate at aggregate and individual property level by studying
primary historic data on house prices and rents for the same homes. We do so
for two important housing markets: Paris (1809–1943) and Amsterdam (1900–
1979). We then compare these novel return estimates to existing measures
based on the Jordà et al. (2019) implied returns, which cover the two cities for
overlapping time periods.
The second main contribution of our paper lies in a better understanding of
the idiosyncratic risk to housing investments. Our data for Amsterdam allow us
to decompose total risk into idiosyncratic risk and market risk at the property
level, and to do that for different holding periods. This provides a unique picture
of the role of idiosyncratic risk – and of the role of the yield component of
the return therein. The market return and risk to housing investments are of

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limited relevance for investment performance, as many residential property

investors hold highly concentrated portfolios, due to the indivisibility of assets,
their capital intensity, and high transaction costs.1 For markets in which full
diversification is unattainable, both theory (see, for instance, Levy 1978; Merton
1987) and empirical works (e.g., Fu 2009; Eiling et al. 2019) suggest that
idiosyncratic risk and expected returns are linked in the cross-section. Existing
work has looked at idiosyncratic capital gains risk in residential properties (e.g.,
Merton 1987; Peng and Thibodeau 2017; Giacoletti 2021; Eiling et al. 2019).
However, this ignores yield risk resulting from changes in the rental values
of properties. To the best of our knowledge, our paper is the first to study
property-level changes in yields and the contribution of property yield risk to
total idiosyncratic risk, and to do that over increasing investment horizons.

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Given housing’s important role in the economy and investment portfolios, it
is important to establish the annual total return and risk to residential real estate
in a way that avoids measurement problems as far as possible, using a data set
that is large and representative enough for reliable inference. Our paper aims
to measure total returns to residential real estate as accurately as possible and
to assess the risk of that investment at the aggregate level and property level.
A longer-run perspective is essential, since holding periods for rental housing
are typically long: in our sample, median holding periods are about 10 years,
and we aim to study the relative role of idiosyncratic and systematic risk for
holding periods of up to 20 years. Despite the enormous size of the housing
market, data limitations regarding capital appreciation, gross rental yields, and
taxes and costs have so far rendered it difficult to make accurate estimates of
the total return and risk on long-term residential real estate investments.
Three recent studies have specifically attempted to construct total return and
risk estimates to real estate investments. Eisfeldt and Demers (2018) study
total returns to rental housing investments between 1986 and 2014 for a panel
of cities in the United States. Although they do not observe actual yields in this
period, they construct implied yields by extrapolating a city-specific hedonic
pricing model for rental properties to owner-occupied properties. Both within
and across cities, they find that rental yields decline in price tiers. Cities with
lower net yields experience higher price appreciation, but have lower Sharpe
ratios because capital gains are more volatile than yields. However, within
cities, this logic reverses, as low price tier areas experience higher total returns
due to both higher yields and higher capital gains.
Longer observation periods are important to establish the time-series
properties of aggregate housing risk and returns over different market conditions
and economic cycles. A recent influential paper by Jordà et al. (2019) constructs
total return indexes from a great number of existing house price and rent indexes,

1 In the Netherlands, for example, data from CBS (Statistics Netherlands) show 47% of the private rental stock is
owned by individuals. Of these buy-to-let investors, 80% own a single property and only 4% own more than five
properties.

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 The Total Return and Risk to Residential Real Estate

based on construction methods that vary over time and across countries. Given
the ambition of their paper, that is, to assess housing investment returns and
risks for a large cross-section of countries between 1870 and today, this is
understandable. Their data collection is momentous as it is. However, their
series may suffer from measurement error in all dimensions of the total return,
that is, the capital appreciation, the gross rental yield, and in taxes and costs.
Moreover, although their indexes aim to pertain to nations as a whole, they
mostly use data on the level of a nation’s main city or cities for the early parts
of their indexes and switch to national data at different moments for each index.
All this might make inferences based on their findings unreliable, and a key
motivation for our paper is to investigate the extent to which such long-term
implied return series are affected by measurement errors.

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Chambers, Spaenjers, and Steiner (2021) have made an impressive effort
to construct estimates of total real estate returns for England, using the
archives of four prominent ‘Oxbridge’ colleges between 1901 and 1983. The
archival ledgers allow to precisely track property-level annual rental income
and costs over time and can be matched to transaction prices when properties
are purchased or sold. This enables them to measure returns much more
precisely, and they find that long-run real estate investment is less profitable
than suggested by Jordà et al. (2019), with a real return to housing of 2.3%, and
5.4% for agricultural property. Given its aim and sample period, their paper
is complementary to our study. Relative to our paper, their study also covers
agricultural land and commercial real estate and specifically investigates the
role of costs in driving asset-level returns and risk. However, because colleges
infrequently transacted property, they cannot directly measure aggregate capital
gains and total returns. To derive a total return statistic for the entire period,
they use changes in the U.K. house price index of Knoll, Schularick, and Steger
(2017) and adjust it to match the yields they do observe.
In this paper, we construct long-term annual total return indexes and provide
a picture of the return and risk to rental housing investment at the aggregate and
the property level, and for different holding periods. To do so, we study two
previously unexplored primary data sets of house prices and rents on individual
homes for Paris (1809–1943) and Amsterdam (1900–1979). These data sets are
large: in total, we hand-collected 171,740 observations of rents, sales prices,
and property-level taxes and costs, covering a representative sample of about
40,000 different properties. We have enough repeated price observations to
estimate capital gains using repeat-sales regressions to control for changes in
housing quality.
The key innovation of our database is that it includes rents and prices
for a large representative set of properties. For Paris, we can link property-
level sales prices to rent prices retrieved from rental contracts or inheritance
records, registered in the years before or after the sale. For Amsterdam, we
observe property-level rents and prices concurrently, and in part of the data even
repeatedly. In total, we have 63,575 observations of property-level gross yields.

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Most existing literature uses implied yields from other series, and studies that
do measure actual yields rely on small samples from a limited set of investors
(Bracke 2015; Chambers, Spaenjers, and Steiner 2021).2
We also have property-level information on taxes and costs, but these data
only cover a subset of properties, so that we cannot study property-level costs
with the same level of detail as Chambers, Spaenjers, and Steiner (2021). To
construct annual cost series, and convert our gross yields to net yields, we
combine our data with city-level data on taxes, costs, and vacancies, similar to
Eisfeldt and Demers (2018).
We find total net geometric returns to rental housing of 6.3% for Paris and
8.0% for Amsterdam, with index-level standard deviations of 8.6% and 10.3%,
respectively. In real terms, geometric average returns amount to 4.0% per annum

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in Paris and 4.8% in Amsterdam. In Jordà et al. (2019), who use data from Paris
and Amsterdam for 90% of the period in which our samples overlap, French
and Dutch returns are, respectively, 1.4% and 2.3% higher than our estimates
and are also less volatile. This results in their Sharpe ratio estimates being
approximately 40% higher than ours. The long-term real return to housing can
entirely be attributed to the rental yield, with real capital gains around zero.
We find that our series of net rental yields are uncorrelated to the implied
yield series in Jordà et al. (2019), showing that it is very difficult to accurately
estimate long-term yields from secondary data. Correlations between our total
return series and those of Jordà et al. (2019) are only 0.3–0.4.
Our findings imply that the long-run risk-return assessment of rental housing
investments are less rosy than previously assumed. Evidence for the housing
risk premium puzzle is much weaker than suggested by Jordà et al. (2019),
especially when property transfer taxes are taken into account, and the much
lower Sharpe ratios we find for Paris and Amsterdam close most of the gap
with equities that Jordà et al. (2019) document.
We find that our real returns for Paris rank lowest among all countries for
which Jordà et al. (2019) provide total returns in the comparable period, while
only three of their countries have lower reported returns than our findings
for Amsterdam, with real returns on average 1.1% per year higher in other
countries. Given the fact that Paris and Amsterdam have both experienced
substantial economic and population growth over our sample periods, one
would not expect such comparatively low housing returns for these two cities.
This suggests that the returns for other countries reported in Jordà et al. (2019)
might be prone to the same errors. This conclusion is supported by the findings
of Chambers, Spaenjers, and Steiner (2021) for the United Kingdom that also
point at much lower housing returns than reported by Jordà et al. (2019).
These results are all at the portfolio level, but, when we account for
idiosyncratic risk, the Sharpe ratios are reduced even further. Our analysis of

2 Bracke (2015) studies 1,922 yields from London for 2006–2012, and Chambers, Spaenjers, and Steiner (2021)
use 1,359 distinct transactions to measure yields, of which 549 are for residential real estate.

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 The Total Return and Risk to Residential Real Estate

idiosyncratic risk is based on a subset of Amsterdam data for which we observe

yields and sales prices repeatedly. These data allow us to study idiosyncratic
risk in residential real estate investment, highlighting the role of yields as a
risk component to housing investments. We document significant persistence
in property-level yields over time, even up to 20-year holding periods, and
even after accounting for differences in yields across neighborhoods. This
implies that properties purchased at above-market yields will continue to earn
above-market yields many years after the purchase.
In aggregate, we find idiosyncratic risk to be substantial, contributing to
about half of gross total return risk for holding periods of 15 years and above.
However, the composition and importance of idiosyncratic risks change over
time. In the short term, nearly all total return risk is idiosyncratic and comes from

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capital gains volatility. Because yields are persistent, yield covariance becomes
an increasingly important component of total risk for longer holding periods.
Idiosyncratic capital gains risk becomes less important relative to systematic
risk, given the flat structure of idiosyncratic capital gains risk across holding
periods (Giacoletti 2021). Although we cannot account for property-level costs
in our analysis of idiosyncratic risk, our findings suggest that ignoring yield
risk substantially underestimates the role of idiosyncratic risk for housing
investments, especially over long holding periods. For a 10-year holding period,
the total volatility of property-level gross housing returns is approximately 50%,
whereas the volatility of 10-year gross portfolio returns is around 32%. For that
holding period, including property-level risk thus implies a reduction in Sharpe
ratios of about 35%.

1. Data and Historical Context

We employ two main archival data sources to construct indexes of actual rental
yields and house prices for Paris and Amsterdam, which we complement with
data from other sources. Table 1 presents a brief overview of the data sources
and the number of observations employed in this paper. Importantly, all our data
contain observations on the level of rents and sales prices of an entire property.
In both Paris and Amsterdam, properties typically contain several housing units.
We provide an overview of our data collection approach for these two cities
in the remainder of this section. Internet Appendix A offers a more detailed
description.

1.1 Paris
We extract the Paris housing data from a land register: the Sommier foncier.
It covers the period from 1809 until 1943 and is part of the wider French
administration responsible for collecting taxes on legal acts, the Enregistrement.
The Sommier foncier provides information on all property transfers and
corresponding prices in Paris. Most transaction prices in Paris are based on
regular sales, but about one-third of transaction prices originate from properties

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Table 1
Sources and sample sizes property-level data

Data type Period # obs. Source

Paris
Sale prices 1806–1943 38,168 Sommier Foncier
Rent prices 1806–1943 44,379 Sommier Foncier
Matched yields 1809–1943 27,722 Sommier Foncier
Taxes 1809–1926 4,474 Sommier Foncier, Tax Registers Sainte-Avoye
Asking yields 1872–1940 10,052 Le Figaro
Realized yields 1883–1939 1,060 Cote des Terrains et Immeubles, Le Temps
Amsterdam
Sale prices 1840–1979 35,519 Brouwer & Zn.; Eichholtz 1997; Verwey 1943
Rent prices 1900–1979 25,834 Brouwer & Zn.
Matched yields 1900–1979 24,741 Brouwer & Zn.
Taxes 1917–1979 9,798 Brouwer & Zn.
Costs 1889–1967 2,454 Burgerweeshuis, Doopsgezinde Gemeente

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Paris transaction prices are based on auction prices (37%) and regular sales (63%), while Amsterdam data are
auction prices (48%), regular sales (8%), and appraisals (44%). Amsterdam rental prices are based on lease
contracts (88%) and appraised rental values (12%).

sold in public auctions. Most properties in Paris were investment properties,

which frequently sold in auctions. A small subset of these auction sales
corresponds to foreclosure sales.
We also obtain data on rents from property donations during lifetime or
inheritances after death (successions). By law, the taxable value on these
transfers was equal to twenty times the sum of all leases on the property.3
The first two series of the Sommier foncier, covering the period until 1880,
also contain information about rental contracts and corresponding prices on
these properties.
The combination of rental prices and house prices for the same properties
allows one to compute property-level gross yields, for a period covering more
than a century, and for the entire city. To the best of our knowledge, this has
been hitherto impossible, even with modern data.
We collect data from a random sample of 327 registers, containing properties
throughout the entire city. In total, we digitize data for approximately 20,000
different residential properties. For each property, we list the street address,
the type of legal act, the registered price or value, and the date of registration
and transfer. Incomplete observations are removed, and the reduced sample
covers 82,547 registrations: regular property sales, auction sales, leases for
entire properties, inheritances, and donations.
After 1870, our rent data are almost entirely based on observations of
declarations of successions and donations, and one might worry that these
are not accurately measuring rental prices. This concern might be particularly
severe after 1918 when the formal legal link between the declared values
and rental prices disappears. To construct an alternative series of yields, we,
therefore, collect 10,052 announcements of property sales from Le Figaro, a

3 Internet Appendix B explains how we recovered the actual rental prices from these observations.

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 The Total Return and Risk to Residential Real Estate

French newspaper, spanning the period from 1872 to 1940. One limitation
of this database is that it is based on asking prices and self-reported rents,
which might deviate from actual rental prices and sales prices. To estimate
the difference between minimum bids and realized prices, we collect 1,060
observations from data in two real estate news bulletins, the Cote des Terrains
et Immeubles and Le Temps Immobilier.
To obtain estimates of taxes, we collect data on paid property taxes for 2,094
observations in the first register of the Sommier. For each of these observations,
we also know the sale or rental price such that we can compute a property
tax rate. To obtain tax rates after 1860, we collect 1,704 property-level tax
observations for a sample of streets in Sainte-Avoye, a neighborhood in Paris.4
We match these to our data from the Sommier. It is not necessary to diversify

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this tax sample since the law prescribed the equivalence of property tax rates
across the city.

1.2 Amsterdam
The city of Amsterdam had and still has a unique history of selling property
for investment purposes in public auctions. Such auctions have been organized
since the 1600s and still take place today. The format of these auctions has
changed very little over time.
The market for auctioned property in Amsterdam was large. For the period
between 1900 and 1942, we gather statistics on the number of properties put
up for sale from the yearbooks of the Amsterdam statistical office (Gemeente
Amsterdam 2018), which indicate that on average about 1,000 properties per
year were put up for auction. This was about 2% of the housing stock. Most
of these properties were auctioned voluntarily (vrijwillige verkoop), but some
properties were sold after foreclosure or bankruptcy (executoriale verkoop).
Selling investment property in auctions was the norm, and foreclosed properties
were sold in the same auctions as regular properties.
Before the advent of modern house price indexes, auctions gave market
participants important information about market prices and yields. Because
most properties were purchased for investment purposes, information on rents
and taxes was presented for nearly every property for sale. Properties were
typically sold with tenants at current rental prices. If a property was not rented
out, the auctions typically listed the assessed rental value of the property. The
auctions were public, so individuals could record and register this information.
Our data regarding these auctions stem from the archives of the Firma Jan
Brouwer & Zn., who developed a unique card system to store information
on sales prices, rents, and taxes of properties sold in these auctions. This
system covers the period from 1900 to 1979 and contains information on 19,786
properties.

4 Archives de Paris, D13P2/17, 67 to 69.

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Beyond registering prices and rents for auctioned properties, the realtor
also registered information on the appraisal value of these properties. These
appraisals were requested by banks and other mortgage providers. The
appraisers assessed both the market value of the property and the rental
value because property developers and investors used rental cash flows to pay
mortgage interest and amortization (Smid 2019). If the property was vacant
or newly constructed, the appraisers estimated the rental value of the property
rather than using actual rent contracts. In a small number of cases, the realtor
also listed data on regular sales prices.
Excluding observations from outside of Amsterdam (4% of the data), this
data collection results in 25,834 observations of rents (88%) or appraised rental
values (12%), 30,528 transaction prices (48%) or appraisals (52%), and 9,798

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observations of taxes. In 24,741 cases, we have both a rental price and a
price observation for the same home in the same year. In 8,579 cases, we
can also adjust this yield for taxes. To complete our database of prices, we
augment it with 2,480 repeated transaction prices from Verwey (1943) for
property auctions between 1840 and 1940, and 2,826 transaction prices from
the Herengracht index database of Eichholtz (1997), covering the 1840–1972
period. Removing duplicate observations across databases, the total number of
prices is 35,519, and 93% of these price observations concern the 1900–1979
period.
To provide estimates of nontax costs, we compile data on actual costs
from the archives of two institutional investors: the Amsterdam Orphanage
(Burgerweeshuis) and the Doopsgezinde Gemeente, an Amsterdam church. For
social institutions like the Burgerweeshuis and the Doopsgezinde Gemeente,
commercial property investments provided the largest part of their funding.
Eichholtz, Korevaar, and Lindenthal (2019) use information on rental contracts
from both institutions to construct multiple series of market rent prices, and
we refer to their paper for information on the investment activity of these
investors. Chambers, Spaenjers, and Steiner (2021) use similar data from
Oxbridge colleges to obtain estimates of costs.
From its archives, we collect property-level information on rental income
and expenses for 100 rental units, covering the period from 1937 to 1969.5
For the Doopsgezinde Gemeente, we obtain data on 30 different properties
spanning the period from 1889 to 1924. Ledgers are incomplete before and
after these periods, but these properties likely stayed in their hands for decades
or even centuries. The mentioned costs include expenses on maintenance and
renovation, taxes, insurance, and management costs (only at property level),
lost rents due to rent arrears and vacancies, and water use (if not paid by the

5 Since the 17th century, the Burgerweeshuis has been among the largest institutional investors in the Amsterdam
residential real estate market. Although the Burgerweeshuis reduced its property portfolio over time, it still owned
60 properties until the mid-20th century, containing over 100 rental units. Most of these properties already had
been acquired in the 16th and 17th centuries.

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 The Total Return and Risk to Residential Real Estate

tenant). In short, this database provides all asset-level costs. In total, this resulted
in 2,454 property-level observations of rental prices and corresponding costs.

2. Components of Total Housing Returns

In this section, we estimate the components of the total returns of residential
real estate in Paris and Amsterdam. The return to rental housing investments
for a property (or a portfolio of properties) consists of both capital gains and
net rental yields (Equation (1)).
Pi,t −Pi,t−1 Ri,t (1−ci,t −τi,t )
Returni,t = + . (1)
Pi,t−1 Pi,t−1

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Pi,t and Ri,t equal the market price and rent of the same property i at time
t. To estimate our total returns as precisely as possible, and to establish how
measurement error could contribute to wrongly specified returns, we split this
equation into three parts. First, we estimate capital gains. The main challenge
here is to adequately control for housing quality, as well as to have sufficiently
large and representative samples of housing transactions since we only observe
market prices for properties when they transact. Second, we look at gross rental
yields: the current or estimated rent divided by the sales price.6 Third, we study
the implications of costs and taxes on yields, with a particular focus on property-
level taxes (τ ). We proxy for nontax costs (c) using institutional cost data for
Amsterdam and findings from other studies and employ time series of vacancy
rates to assess vacancy costs.

2.1 Capital appreciation

The literature has employed a wide set of methods to estimate house price
indexes, some aiming to control for changes in quality of the underlying housing
stock, and some not. Of the former, the two most commonly used are the repeat-
sales method (Bailey, Muth, and Nourse 1963) and the hedonic method (Rosen
1974). In a standard framework, the log price of a transaction (pi ) at time t can
be written as the sum of a “quality” component (α) and a time-varying market
value component (β) plus a transaction error (ε).
pi,t = αi +βt +εi,t (2)
Crucial to both methods is that they attempt to separate improvements in the
quality of homes from increases in market prices. Because the quality of the
housing stock has increased throughout the 20th century, inadequate quality
control will result in indexes with an upward bias (Eichholtz, Korevaar, and
Lindenthal 2019). In the repeat-sales method, which we employ for both cities

6 Note that, formally, rental yields slightly differ from the rental returns defined in Equation (1). The latter expresses
the rent price relative to the market price in the previous period. Our rent observations specify the annual rental
price at the time of the transaction: we thus assume this is equal to the rental price for the upcoming year.

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 The Review of Financial Studies / v 34 n 8 2021

in this paper, this is accomplished by focusing on repeated transactions of

the same properties. Because we do not have observations on actual housing
quality for the properties in our sample, using the hedonic alternative is not
feasible.
For both Paris and Amsterdam, we estimate a standard repeat-sales index,
controlling for the type of sale observed in the data. For the Parisian index,
we use data from 1806 to 1943 to estimate the index but only report on its
development from 1809 to 1943 when the number of repeat-sales is large. For
Amsterdam, we include price observations for the entire period from 1840 to
1979 but only report on the index development from 1900 to 1979, the period
for which we have yield data besides transaction prices.
To reduce the sensitivity of our index to extreme outliers, which may signal

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unobserved changes in quality or cases where only a part of a property was
sold (but not indicated), we exclude price pairs that have a log price difference
exceeding 1.95 or below -1.95 after correcting for log changes in the rent price
index from Eichholtz, Korevaar, and Lindenthal (2019) (> 600% or < −86%).
For Paris, this removes 1,456 price pairs, leaving us with 17,770 price pairs
to estimate the house price index. For Amsterdam, we use 15,125 transaction
pairs to estimate the index, excluding 161 outliers.
Table 2, panel A, provides summary statistics of the new house price indexes.
We find comparable figures for both cities. For Paris, we find a geometric
average capital gain of 2.4% (arithmetic: 2.8%), with a standard deviation of
8.7%. Adjusted for inflation, the capital gain is 0.3% per year.7 For Amsterdam,
we find a geometric average annual log capital gain of 2.6% (arithmetic: 3.1%)
and a standard deviation of 10.3%. Adjusting for inflation, the real log capital
gain averages −0.6% per year.

2.2 Yields
2.2.1 Gross yields. To estimate the gross annual rental yield for the two cities,
we divide the summed rental prices of properties in the sample by their summed
sales prices for each year. For Amsterdam, all yields are based on the rental
price in the year of the sale. For Paris, we typically do not observe the value of
the rent price (R) in the same year as the sales price (P ), and we adjust for this
using Equation (3). On average, we observe two rent price observations and
two house price observations for each property. To be able to compute yields,
we link each property sale to the nearest rent observation on the property before
the sale (at time t-x) and after the sale (at time t+z), with x and z limited to
30 years. We adjust these rent observations for changes in market rent prices,
which we estimated using a repeat-rent index (RP I ) based on observations of
rental contracts, successions, and donations, estimated using Equation (2). To
compute the final yield, we apply linear interpolation, so that rent observations

7 We use the CPI indexes assembled in Eichholtz, Korevaar, and Lindenthal (2019) for both Paris and Amsterdam.
These are city-specific CPI indexes pooled from various sources.

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 The Total Return and Risk to Residential Real Estate

Table 2
Capital gains, rental yields, and total returns

Geometric Arithmetic Real geom.

Index Period Mean SD Mean SD Mean SD Sharpe
A. Capital gains
Paris 1809–1943 2.4% 8.7% 2.8% 8.9% 0.3% 10.3%
Amsterdam 1900–1979 2.6% 10.3% 3.1% 10.6% −0.6% 10.3%
B. Gross yields
Paris 1809–1943 6.9% 1.1% 7.2% 1.2%
Amsterdam 1900–1979 9.9% 2.0% 10.5% 2.3%
C. Net yields
Paris 1809–1943 3.9% 0.7% 4.0% 0.7%
Amsterdam 1900–1979 5.4% 1.2% 5.5% 1.2%
D. Total returns
Paris 1809–1943 6.3% 8.6% 6.8% 8.9% 4.0% 10.2% 0.25
Amsterdam 1900–1979 8.0% 10.3% 8.7% 10.6% 4.8% 10.3% 0.35

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This table reports the headline estimates for capital gains, gross yields, net yields, and total returns for both Paris
and Amsterdam in geometric, arithmetic, and real geometric terms. Sharpe ratios for total returns are computed
using long-term bond rates for France and the Netherlands.

closest to the sales price get the most weight, and divide these by the sales price
at time t:

z Ri,t−x RP It x Ri,t+z RP It
Y ieldi,t = × × + × × . (3)
x +z Pi,t RP It−x x +z Pi,t RP It+z

At the annual level, the estimates on portfolio yields can be sensitive to

extreme observations in the data. Most importantly, very large properties or
properties with extreme yields can distort the yields at the annual level. To
combat this, we remove observations that have log yields deviating more than
1.39 from the median log yield in the sample (more than 300% larger or -
75% smaller). Second, we remove observations with extremely high rent levels
(> 800% of the median house rent). For Paris, there remain 24,827 gross yields
in the sample, and for Amsterdam 25,058 yields. Again, this procedure removes
a larger fraction of observations for Paris (10% of data, 2,895 yields) relative
to Amsterdam (3% of data, 683 yields), due to the larger amount of noise in
the Parisian data.
Table 2, panel B, shows a Parisian gross log portfolio yield for rental
housing of 6.9%, with a standard deviation of only 1.1%. For Amsterdam, the
average gross log portfolio yield equals 9.9% with a larger standard deviation
of 2.0%. We plot the series in Figure 1. For Paris, the gross yield moves in
a rather limited range, roughly between 5% and 10%, with relatively high
yields in the Napoleonic Era, after the Siege of Paris in 1870, and during
the Great Depression. The picture is more volatile for Amsterdam than for
Paris. Amsterdam yields are quite stable until 1965, and then start increasing
substantially in the late 1960s, with the gross yield peaking at more than 20%

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 The Review of Financial Studies / v 34 n 8 2021

Paris

0.20
Amsterdam

0.15
Gross Yield

0.10
0.05
0.00

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1850 1900 1950

Figure 1
Gross housing yields, Paris and Amsterdam
This graph provides gross yields to rental housing for Paris (1809–1943) and Amsterdam (1900–1979). For Paris,
the gross yield moves in a rather limited range, roughly between 5% and 10%. For Amsterdam, the average gross
yield is 10%, with a peak of 20% in the 1970s. In the periods in which the Paris and Amsterdam series overlap,
they correlate closely (correlation = .75).

in the 1970s. The evolution of yields in the overlapping period appears to be

similar, with yields declining at the end of World War I, but increasing in
the 1920s and 1930s. The correlation between the gross yields for Paris and
Amsterdam in that period is 0.75.

2.2.2 Costs. For Paris, we compute the average annual tax rate directly for a
subset of 2,094 transaction prices or rents between 1809 and 1854 for which
we have information on the level of the annual property tax, expressing it as
a fraction of total rent. Between 1855 and 1917, we match tax payments on
the properties in Sainte-Avoye to the rental prices coming from successions,
donations, and rental contracts in the Sommier. To match rental prices to tax
payments, we use the same procedure that we employ to match rental prices
to sales prices, by finding the nearest rent price on the property and adjusting
these for changes in the market price. We compute the average tax rate based
on these matched observations and interpolate it for years in which data are
missing. Because tax rates were very stable in this period, this likely does
not introduce major errors. After 1917, we use data from Duon (1946) who
computed the fraction of property taxes borne by the property-owner annually,
expressing it as a fraction of gross rent.
For Amsterdam, one-third of the rental yield observations include the
required property-level taxes (9,798 observations). The most important of these
were direct property taxes, street taxes, and a fee for the use of water. For
properties with leaseholds, we also register land lease costs. From 1924 onward,
sufficient observations are available to estimate the level of taxes as a fraction of

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 The Total Return and Risk to Residential Real Estate

total rents.8 To do so, we compute the average tax rate in each year, controlling
for differences in tax rates due to the presence of land leases. To estimate the
level of tax yields before 1924, we estimate a repeated-tax index based on
635 annual observations of taxes for properties of the Doopsgezinde Gemeente
between 1900 and 1924. We use the 1924 tax rate to splice these to the tax rate
series from the yield database. For periods of missing data (1915–1916), we
interpolate the tax rate.
In Amsterdam, annual taxes account on average for 14.8% of property rental
value, with a volatility of 5.6%. In Paris, tax rates amount on average to 10.7%
of the rental value with a volatility of 4.3%. Internet Appendix C offers a more
detailed discussion of the different taxes and their evolution over time.
To measure vacancy rates, we make use of city-level statistics. For

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Amsterdam, we compute the annual vacancy rate by dividing the number of
vacant housing units in the market by the total number of housing units in
Amsterdam. For most years, this is reported in the statistical yearbooks of the
Municipality of Amsterdam (Gemeente Amsterdam 2018) or in the national
housing censuses. In case data are missing, we linearly interpolate vacancy
rates (1900–1908, 1945–1946, 1948–1955, and 1957–1965). Vacancy rates in
Amsterdam were low, with an average of 2%, a low of 0.3% right after World
War II, and a high of 5.5% in 1935. For Paris, we use estimated vacancy rates
based on the statistical yearbooks of Paris and data on the number of vacant
accommodations given by Faure and Lévy-Vroelant (2007) and Duon (1946).
Prior to 1869, no vacancy data are available, and we use the 1869 number for
this period. We linearly interpolate data in periods with missing data, mostly
in the 1870s and 1880s. Vacancy rates average 3.1% of rental value in Paris.
One limitation of our sample is that we do not have asset-level information
on costs other than taxes, implying that we have to make estimates of these
costs based on other sources of data. The approach we take in this paper is to
make a well-informed estimate of the total amount of costs other than taxes and
vacancies, using estimates from our Amsterdam cost data and findings from
other literature.
First, we estimate the average fraction of nontax and nonvacancy costs in our
institutional cost sample from Amsterdam. Excluding vacancy costs and taxes,
but including maintenance costs, management costs, and insurance costs, the
cost fraction on residential properties averages 31.8% in our sample. This value
reduces to about 26.5% when we control for location, taking properties along the
main canals as baseline, and the relative value of properties. Larger properties
and properties in expensive locations tend to have lower cost fractions, while
the properties in the sample are a bit less expensive than average. Internet
Appendix D provides a more detailed discussion of our cost data and analysis.

8 The rental tax rate can be estimated more precisely than the tax rate as a fraction of property value.

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 The Review of Financial Studies / v 34 n 8 2021

In comparable studies, the fraction of nontax costs typically amounts to

approximately 30%–35% of rental value. For the United States, Eisfeldt and
Demers (2018) apply a fixed fraction of about 35% of the total rental value
as costs, and add time-varying local property tax costs and vacancy costs to
this estimate, as we do in this paper.9 Chambers, Spaenjers, and Steiner (2021)
have full information about property-level costs and study a comparable time
period as we do. They find actual costs for residential real estate of 32% of
gross rental income, including taxes, but excluding vacancy costs. The cost
fractions they identify fluctuate substantially over time but only apply to a
very specific group of investors: Oxford and Cambridge colleges. For Paris,
the tax authorities assumed a 25% maintenance cost fraction since the French
Revolution, including management and insurance costs (Duon 1946). Jordà

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et al. (2019) also discuss the evolution of maintenance costs historically, and
find that maintenance, management, and insurance costs constitute about 30%
of gross rent without strong time trends.
Based on our findings in our cost analysis and other estimates in the literature,
we apply a fixed cost fraction to our gross yields of 30% of the rental value for
both Paris and Amsterdam, excluding costs for vacancies and taxes.

2.2.3 Net yields. The next step is to convert the gross rental yields reported
in Table 2, panel B, to net rental yields, using our estimates of costs, taxes, and
vacancy rates. These are reported in panel C of Table 2, and we observe a net
yield for Paris of 3.9% for the full 1809–1943 sample period, and a net yield
of 5.4% for Amsterdam for the 1900–1979 period.
Given some uncertainty surrounding the true level of maintenance and
management costs, and their evolution over time, these numbers might be
different if cost fractions differed from our estimates. For example, if the true
cost fraction excluding taxes and vacancies was 25% or 35% of the rental value,
instead of 30%, net yields would increase or, respectively, decrease by 0.35%
in Paris and 0.5% in Amsterdam.

3. Returns to Rental Housing: Results and Discussion

This section first provides aggregate statistics on total returns for Paris and
Amsterdam, both in nominal and in real terms, and will then go into a discussion
of our results in the light of existing research on this topic.

3.1 Total return to residential real estate

We first deflate nominal returns into real returns, for which we use the CPI
indexes assembled in Eichholtz, Korevaar, and Lindenthal (2019) for both

9 They assume nontax and nonvacancy costs are the sum of 2.13% of property value and 6.63% of rental value,
which equates to about 35% of the property value based on the gross yields in their sample.

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 The Total Return and Risk to Residential Real Estate

Paris and Amsterdam. These are city-specific CPI indexes pooled from various
sources. We combine the housing capital value index reported in Section 2.1
with the net yield development in Section 2.2.3 by directly applying Equation
(1) to get the total net return to rental housing in Paris and Amsterdam. Table 2,
panel D, provides statistics for these series.
First, the geometric average net return to rental housing is 6.3% for Paris
(arithmetic: 6.8%) and 8.0% for Amsterdam (arithmetic: 8.7%). In real terms,
geometric returns in both cities are more similar: 4.0% in Paris and 4.8%
in Amsterdam. The lack of any real capital gains on housing for both Paris
and Amsterdam also implies that the real total long-term returns on housing
over time accumulate from rental cash flows rather than capital gains. The
standard deviations of the nominal total return are 8.6% for Paris and 10.3%

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for Amsterdam, almost equalling the standard deviation of the capital return
for these cities.
To assess risk premiums and Sharpe measures, we use series of long-term
bonds returns that we can apply consistently over time since bill rates are not
available for all time periods. For France, we use the bond yield on French 5%
annuities before 1833, and the 3% annuity between 1833 and 1943. For the
Netherlands, we take the long-term Dutch government bond yield from 1900
to 1979, also reported in Jordà et al. (2019). Relative to long-term government
bonds, housing earned a risk premium of about 2.1% in Paris and 3.5% in
Amsterdam. Combining this with the standard deviations of the geometric total
returns gives a Sharpe ratio of 0.25 for Paris and 0.35 for Amsterdam.
Figure 2 reports the evolution of real cumulative returns over time for
both Paris and Amsterdam. Real total returns dwarf capital gains but the
disproportionate influence of capital gains on total return volatility is evident,
especially for Paris after 1914. The consequences of World War I scarred
the performance of real estate investments in Paris, as France experienced
significant inflation and introduced nominal rent controls. This was much less
the case in Amsterdam, as the Netherlands was neutral during World War I. In
Amsterdam, real total returns accumulated steadily up to the 1930s, then went
into a 20-year hiatus following the Great Depression and World War II, before
picking up pace again in the 1950s.

3.2 Comparing our indexes to previous work

Having established our main estimates for housing returns in both Paris and
Amsterdam, this remainder of this section aims to discuss these estimates in
more detail. First, we want to address how our estimates compare to the results
reported in Jordà et al. (2019) and in other related literature and discuss the
likely role of measurement error in the differences between our estimates and
previous series. This section also discusses how our improved estimates for
Paris and Amsterdam change our view regarding the performance of housing
as an asset class, particularly relative to equities. We will end the subsection

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 The Review of Financial Studies / v 34 n 8 2021

50000
(a)
Total Return
Capital Gain
10000
1809=100, in logs

2000
500
200

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50

1820 1840 1860 1880 1900 1920 1940

Paris
(b)
5000

Total Return
Capital Gain
2000
1900=100, in logs

500
200
100
50

1900 1920 1940 1960 1980

Amsterdam

Figure 2
Real total returns and capital gains
These graphs depict inflation-adjusted cumulative total returns and capital gains for Paris and Amsterdam. Real
capital gains are dwarfed by total returns, but the price volatility is very visible, especially for Paris after 1914.
World War I scarred the real estate investment performance in Paris but did not affect Amsterdam much. In
Amsterdam, real total returns steadily accumulated up to the 1930s, then went into a 20-year hiatus before
picking up pace again in the 1950s.

with a short discussion of potential limitations and issues with our estimates,
and provide the results of the robustness checks.

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 The Total Return and Risk to Residential Real Estate

(a)
Repeat−Sales Index
Duon (1946)
500
Knoll et al. (2017)
200
Index (1900=100)

100
50
20
10

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1820 1840 1860 1880 1900 1920 1940
Price index, Paris, 1809–1943

(b)
Repeat−Sales Index
2000

Knoll et al. (2017)

Ambrose et al. 2013
1000
Index (1900=100)

500
200
100
50

1900 1920 1940 1960 1980

Price index, Amsterdam, 1900–1979

Figure 3
House price indexes
The plots compare our new repeat-sales indexes for Paris and Amsterdam with earlier repeat-sales indexes that
rely on smaller samples, and sometimes apply smoothing techniques. For Paris between 1870 and 1935, Knoll,
Schularick, and Steger (2017) use the index of Duon (1946) but switch to national data from 1935 onward, so
that the index of Knoll, Schularick, and Steger (2017) diverges from Duon (1946). For Amsterdam, Knoll et al.
(2017) switch to national data from 1970, while the index of Ambrose, Eichholtz, and Lindenthal (2013) uses
national data from 1965.

3.2.1 Capital gains. We start our comparison of total housing returns by

looking at changes in house prices for Paris and Amsterdam. Figures 3a and 3b
depict our newly estimated repeat-sales indexes in nominal terms and compare
the nominal indexes with other housing series, most specifically those used by
Knoll, Schularick, and Steger (2017), on which the total return estimates in
Jordà et al. (2019) are based. Table 3 provides numerical comparisons.
For Paris, Knoll, Schularick, and Steger (2017) used the index of Duon (1946)
for the period between 1870 and 1935. This index is likely the world’s oldest

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Table 3
Comparing return estimates

Geometric Arithmetic Real geom.

Index Period Mean SD Mean SD Mean SD Corr.
A. Capital gains
Paris 1840–1943 2.4% 8.6% 2.8% 8.9% −0.6% 10.3%
Paris (Duon 1946) 1840–1943 2.7% 5.8% 3.0% 6.0% −0.2% 8.5% 0.39
Paris 1871–1943 2.4% 9.3% 2.9% 9.7% −1.5% 11.3%
Paris (Knoll, Schularick, and Steger 2017) 1871–1943 3.2% 7.6% 3.5% 8.6% −0.7% 9.2% 0.31
Amsterdam 1900–1979 2.6% 10.3% 3.1% 10.6% −0.6% 10.3%
Amsterdam 1900–1979 3.5% 26.0% 7.0% 27.3% 0.4% 25.5% 0.31
(Ambrose, Eichholtz, and Lindenthal 2013)
(Knoll, Schularick, and Steger 2017) 1900–1979 3.9% 10.9% 4.6% 11.2% 0.8% 9.5% 0.40
Amsterdam
B. Net yields
Paris 1871–1943 4.3% 0.6% 4.4% 0.6%

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Paris (Jordà et al. 2019) 1871–1943 4.9% 0.7% 5.0% 0.8% 0.11
Amsterdam 1900–1979 5.4% 1.2% 5.5% 1.2%
Amsterdam (Jordà et al. 2019) 1900–1979 6.3% 2.1% 6.5% 2.3% -0.08
C. Total returns
Paris 1871–1943 6.7% 9.3% 7.3% 9.6% 2.8% 11.4%
Paris (Jordà et al. 2019) 1871–1943 8.1% 7.8% 8.6% 8.8% 4.2% 9.6% 0.30
Amsterdam 1900–1979 8.0% 10.3% 8.7% 10.7% 4.8% 10.3%
Amsterdam (Jordà et al. 2019) 1900–1979 10.2% 10.6% 11.1% 10.9% 7.1% 9.2% 0.39
This table compares our results on capital gains, net yields, and total returns to previous studies. The correlation
coefficient is computed as the correlation in capital gains, yields, or log returns with our baseline series. The house
price indexes from Knoll, Schularick, and Steger (2017) are used to compute capital gains and corresponding
total returns in Jordà et al. (2019). The price index of Duon (1946) for Paris was smoothened using a moving
average of unknown length. This explains the low volatility and correlation of this series and that of Jordà et al.
(2019), who use Duon’s index until 1935. Until 1965, the Ambrose, Eichholtz, and Lindenthal (2013) index for
Amsterdam is based on a small number of transactions along the Herengracht, Amsterdam’s most affluent canal,
resulting in very high volatility and low correlation. Knoll, Schularick, and Steger (2017) use a smoothened
version of this index.

repeat-sales index, although it is unclear how this index was constructed exactly.
Duon traced all previous sales for the 4,389 homes sold in Paris between 1941
and 1944 and used this to estimate a house price index. Duon then smoothed his
index using a moving average of unknown length (Duon 1943), to cope with
the low number of transaction observations.
Given the overlap in methodology, this index unsurprisingly displays a very
similar long-term development to ours, but because of smoothing, it is less
volatile than our index. This is visible in the graph and in the numbers: the
standard deviation of annual capital gains is 5.8%, relative to 8.6% for our
index in the same period, as can be observed in panel A of Table 3. This table
also shows a correlation of 0.39 between house price changes according to the
Duon index and our Paris house price index.
Knoll, Schularick, and Steger (2017) use this index until 1935, and then
splice it to a national repeat-sales house price index. However, house prices
bottomed out in 1935, and because the index of Duon (1946) is smoothed, the
splicing takes place at an overly high index level, resulting in an underestimation
of the fall in house prices that took place in the 1930s. As a result, Knoll,
Schularick, and Steger (2017) find much higher average house price growth
in this period. So because the index of Duon (1946) is a smoothed index,

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 The Total Return and Risk to Residential Real Estate

Knoll, Schularick, and Steger (2017) substantially underestimate volatility in

the 1870–1935 period, and then overestimate price growth afterward due to
incorrect splicing. The correlation between the Knoll, Schularick, and Steger
(2017) index and our Paris index is only 0.31.
For Amsterdam, we compare the capital return part of our index to the indexes
in Ambrose, Eichholtz, and Lindenthal (2013) and Knoll, Schularick, and
Steger (2017). Both indexes are primarily based on the biannual Herengracht
index of Eichholtz (1997). Their index employs repeated sales of 17th–18th
century properties along Amsterdam’s best-known canal, ensuring constant
quality. Ambrose, Eichholtz, and Lindenthal (2013) estimated an annual version
of the Herengracht index, while Knoll, Schularick, and Steger (2017) annualize
the original index by applying the biannual observation only for the first of the

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2 years. To interpolate the second year, which is now missing, they take simple
averages of the previous and next observation.
These differences in index construction and sample result in substantial
differences between our indexes and these alternative estimates. Without
adjustment, the low number of observations in the annual Herengracht index
of Ambrose, Eichholtz, and Lindenthal (2013) results in unrealistically high
levels of volatility. The volatility in Knoll, Schularick, and Steger (2017) is
more realistic and closer to ours, but this seems coincidental given the rather
forceful smoothing technique they use. While smoothing can bring volatility
down to levels that are seemingly more realistic, it completely changes the
process that generates annual capital gains and will result in volatility estimates
that are biased and inconsistent. By estimating annual indexes—both for Paris
and Amsterdam—that are based on much larger sets of repeat sales, our new
indexes strongly mitigate these estimation problems.
We find that capital gains in Amsterdam are substantially lower in our index
relative to Ambrose, Eichholtz, and Lindenthal (2013) and Knoll, Schularick,
and Steger (2017). The Herengracht database, on which their indexes are based,
has a very low number of observations from the mid-1960s onward, resulting
in very high but even more uncertain growth rates of house prices. Knoll,
Schularick, and Steger (2017) switch to a national house price index from 1970
built on median prices, whereas Ambrose, Eichholtz, and Lindenthal (2013)
already do so from 1965. The difference in capital gains is completely caused
by this switch to an annual index that does not control for quality. Low index
quality, as defined by the degree to which the index adjusts for the changing
quality of the underlying housing stock, results in apparently higher house price
increases, as Gatzlaff and Ling (1994) and Eichholtz, Korevaar, and Lindenthal
(2019) show.
The issues discussed above result in relatively low correlations between the
capital gains in our new house price index for Amsterdam and those in Ambrose,
Eichholtz, and Lindenthal (2013) and Knoll, Schularick, and Steger (2017): we
find levels of 0.31 and 0.40, respectively. Because the volatility of capital gains
is much higher than that of yields (Table 2), these differences in index quality

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 The Review of Financial Studies / v 34 n 8 2021

0.14
Portfolio Net Yield − Paris
Jorda Rental Yield − France

0.12
Portfolio Net Yield − Amsterdam
0.10
0.08 Jorda Rental Yield − Netherlands
Yield

0.06
0.04
0.02
0.00

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1850 1900 1950

Figure 4
Net yields, Paris and Amsterdam
Net yield estimates for both cities are compared to the implied yield underlying the Jordà et al. (2019) total return
calculations, which show a different evolution, in particular for Amsterdam.

also will be the main cause of the low correlation in total returns between our
series and Jordà et al. (2019).
We do not think these issues are unique to these series for Paris and
Amsterdam but apply to historical series of house prices and rent prices more
generally. Given limitations in data availability, long-term series of house prices
and rents still frequently build on relatively thin databases and often splice
together indexes constructed with different methods, from different localities,
and based on different housing quality segments. For example, for rent prices
in the United Kingdom, Chambers, Spaenjers, and Steiner (2021) suggest
the estimates of Jordà et al. (2019) diverge from those in their paper and in
Eichholtz, Korevaar, and Lindenthal (2019) because of inappropriate index
splicing and insufficient control for quality changes in the underlying housing
stock. For house prices in the United States, Fishback and Kollmann (2014)
provide an extensive comparison with the well-known index of Shiller (2005)
for the years between 1920 and 1940, when the Shiller index relies on self-
reported repeat-house values rather than actual transaction prices. They show
that the resultant index substantially underestimates the magnitude of the boom
and the bust in this period relative to several alternative measures they develop.

3.2.2 Yields. Figure 4 plots the development in net rental yields at the portfolio
level for both Paris and Amsterdam relative to the yields in Jordà et al. (2019).
Comparing our net yields to those of Jordà et al. (2019) for the periods when
both samples overlap, we find that our annual net yields are about 1% lower.
Correlations between our net yields and those of Jordà et al. (2019) are only
0.11 for Paris and −0.08 for Amsterdam.

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 The Total Return and Risk to Residential Real Estate

The low correlations with Jordà et al. (2019) are partly caused by the fact that
we adjust for time-varying taxes and vacancies, while they do not. However,
when we look at correlations between the gross yields (not reported in the table)
we observe that they are slightly higher but still low: 0.22 for Paris and 0.21
for Amsterdam.10
These low correlations show it is difficult if not impossible to accurately
derive the evolution of rental yields over time from series of house prices and
rents that relate to different sets of dwellings or use different methodologies.
The French yield series in Jordà et al. (2019) are primarily based on quality-
controlled series of Parisian prices and rents but originate from different sources
and housing market segments, and use different methodologies. For their
Dutch yield estimates, Jordà et al. (2019) combine quality-controlled series

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of Amsterdam house prices with national rent price series that do not control
for quality. Brounen et al. (2014) use similar data sources and are therefore
prone to the same error. These considerations also hold for papers that combine
more recent house price and rent data, such as Eisfeldt and Demers (2018) and
Giglio et al. (2018).

3.2.3 Total returns. Relative to Jordà et al. (2019), we estimate lower total
returns: the difference in annual geometric returns is 1.4% for Paris, and 2.2%
for Amsterdam. For both cities, about 60% of the total real return difference
between our returns and those of Jordà et al. (2019) is caused by lower capital
gains, and the remaining 40% can be attributed to lower yields. While the
volatility estimates for Amsterdam are comparable to Jordà et al. (2019), we
find higher estimates of volatility for Paris. For the periods where our samples
overlap, we find substantially lower Sharpe ratios. For Paris, we find a Sharpe
ratio of 0.31 instead of their 0.54 and 0.35 instead of 0.55 for Amsterdam
(Sharpe ratios not reported in the table).11
We find low correlation coefficients in annual log returns between our total
return series and those of Jordà et al. (2019), even as both series attempt to
track the same asset base. For Paris and Amsterdam, the correlations are 0.30
and 0.39, respectively.
In the previous subsections, we have already provided a number of reasons
why the series used in Jordà et al. (2019) result in distorted estimates of capital
gains and yields over the short term, and we will point at some limitations in
our own series in the robustness section. Some of these distortions, such as the
use of smoothing in the underlying capital gains series in Jordà et al. (2019),
will reduce correlations in short-term return estimates, but vanish in importance

10 For Paris, we also find very low correlations with the Jordà et al. (2019) yields using alternative measures of
yields, with a value of 0.02 when we use the gross yield series based on Le Figaro data.
11 Using bill rates instead of bond yields whenever they are available, our Paris Sharpe ratio is 0.42 against 0.69 in
Jordà et al. (2019), and, for Amsterdam, these numbers are 0.45 and 0.65, respectively.

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Table 4
Longer horizons

Length New index Jordà et al.

Index (Years) Mean SD Mean SD Corr.
Paris, 1871–1943
log yields 1 4.3% 0.6% 4.9% 0.7% 0.11
log yields 3 12.9% 1.6% 14.7% 2.1% 0.17
log yields 5 21.5% 2.4% 24.4% 3.3% 0.20
log yields 10 42.4% 4.0% 48.1% 5.7% 0.16
Nominal log returns 1 6.7% 9.3% 7.9% 7.5% 0.30
Nominal log returns 3 20.3% 17.4% 22.8% 14.5% 0.59
Nominal log returns 5 33.4% 22.5% 37.5% 17.5% 0.81
Nominal log returns 10 65.4% 28.2% 74.1% 22.5% 0.88
Real log returns 1 2.8% 11.4% 4.0% 9.4% 0.55
Real log returns 3 9.2% 21.8% 11.7% 22.2% 0.78
Real log returns 5 15.6% 29.6% 19.8% 31.9% 0.91

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Real log returns 10 32.2% 41.1% 41.0% 44.7% 0.95

Amsterdam, 1900–1979
log yields 1 5.4% 1.2% 6.3% 2.1% −0.08
log yields 3 16.2% 3.4% 19.1% 6.1% −0.12
log yields 5 27.0% 5.5% 32.2% 9.7% −0.16
log yields 10 53.6% 9.7% 65.6% 17.4% −0.22
Nominal log returns 1 8.0% 10.4% 10.2% 10.7% 0.39
Nominal log returns 3 23.4% 19.6% 31.1% 24.3% 0.65
Nominal log returns 5 38.8% 27.1% 51.1% 33.1% 0.75
Nominal log returns 10 75.3% 37.8% 101.8% 51.3% 0.78
Real log returns 1 4.8% 10.4% 7.1% 9.2% 0.31
Real log returns 3 14.3% 17.9% 21.8% 18.4% 0.46
Real log returns 5 23.3% 23.9% 35.8% 21.7% 0.52
Real log returns 10 44.9% 33.9% 71.4% 30.3% 0.49
This table reports average total geometric returns across investment horizons of 1, 3, 5, and 10 years, comparing
estimates in Jordà et al. (2019) to our new estimates. We compute these by summing log returns over the respective
horizons. Note that the sample periods used to compute annual and longer-term horizons do not fully overlap,
because we need more prior return observations to compute returns over longer horizons.

at longer horizons. We thus might expect higher correlations when computing

returns at longer horizons.
To better understand how total returns developed and correlated over
medium-term horizons, Table 4 shows the level of average total log yields
and returns for different horizons of up to 10 years, both in nominal and in real
terms.
For both Paris and Amsterdam, we find that the low correlations between the
yields in our series and those in Jordà et al. (2019) persist when we compute
them based on summed log yields across increasing medium-term horizons.
This is concerning for housing return estimates based on implied yields since
in the long run most of the real return to housing originates from yields rather
than capital gains.
Over medium-term horizons, the volatility of capital gains remains the
dominant component that is driving total return volatility. Comparing the
volatility of total yields in Table 4 to those of total returns shows that yield
volatility remains minor relative to total return volatility at all horizons. This
is particularly so for Paris.

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 The Total Return and Risk to Residential Real Estate

We find stronger correlations in nominal and real returns at longer horizons,

particularly for Paris. This is consistent with the underlying data. For 93% of the
overlapping sample period, the French capital gains data in Jordà et al. (2019)
is based on a representative but smaller set of Parisian repeat-sales. Given the
limited importance of yields in driving total return volatility, the French total
return estimates in their paper should correlate highly with our series over
longer horizons, when the applied smoothing techniques only have a limited
impact on total returns.
For Amsterdam, the increase in correlation for lengthening time horizons
is much less pronounced, particularly in real terms. First, yield volatility in
Amsterdam is much higher compared to Paris, and therefore also significantly
contributes to total return estimates over longer horizons. This should decrease

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correlations with Jordà et al. (2019), since implied yield series do not correlate
with actual yield series, also over longer horizons. Second, the capital gains
series in Jordà et al. (2019) switch to a national house price index that does
not adjust for quality from 1970 onward, which diverges substantially from the
capital gains based on our quality-adjusted series for Amsterdam. Finally, most
of the increase in correlation in nominal terms appears to be driven by high
inflation rates that are reflected in both series, since the increase in correlation
between 3- and 10-year horizons is negligible in real terms.
Because small errors in rent or price series can lead to persistent under-
or overestimation of yields, we find that implied return and yield series have
low correlations with more accurately constructed return series, both in the
short and in the long terms. So only when the underlying series very precisely
track the evolution of rents and market prices and cover the same location
and housing market segments, can return estimates from implied returns be
informative about the evolution of longer-term returns. Unfortunately, long-
term series having such properties are rare.
Until now we have compared our return estimates to other estimates for Paris
and Amsterdam. A second, more complicated question is how these returns
compare to estimates for other regions. When we compare our estimates to the
numbers Jordà et al. (2019) report for other countries, we find that our real return
index for Paris ranks lowest among all countries for which Jordà et al. (2019)
provide return numbers in the 1870–1943 period.12 For all countries that Jordà
et al. (2019) consistently report on in the 1900–1979 period, eight countries
have higher returns and three countries have lower returns than Amsterdam,
with real returns on average 1.1% per year higher in other countries.
Without a proper counterfactual, it is difficult to identify whether these
differences are driven by measurement error or by actual differences in returns
across regions. However, the comparatively low return estimates for Paris and
Amsterdam, both capital cities that grew substantially over time—economically

12 Their sample includes only four countries in 1870 but increases to 11 countries by 1900. Average returns in all
these 11 countries are higher in the 1870–1943 period than in our estimates for Paris.

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 The Review of Financial Studies / v 34 n 8 2021

and population-wise—suggest that measurement errors might affect their return

series for other countries, leading to an overestimation of the total return to rental
housing investments for these countries as well. This conclusion is supported
by the findings of Chambers, Spaenjers, and Steiner (2021) for the United
Kingdom. They also find substantially lower rental housing returns than Jordà
et al. (2019).
However, Chambers, Spaenjers, and Steiner (2021) look at a portfolio of
urban and rural properties, whereas our own analysis and that of Jordà et al.
(2019) are based on urban rental housing. In that regard, a more representative
comparison might be to look at a consistent urban sample. Although precise
return numbers are not available for other cities, implied discount rates of urban
housing cash flows could be informative of long-term housing returns. Bracke,

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Pinchbeck, and Wyatt (2018) use leasehold data to measure housing discount
rates in London for different horizons. They find discount rates of housing cash
flows in the short term in the range of 5%–6%. For horizons of 10–75 years,
discount rates hover around 4%–5%, similar to the real return and net yields
we document in this study. For very long-horizons of over 100 years, Bracke,
Pinchbeck, and Wyatt (2018) find discount rates of 2%–3%. This number is in
line with Giglio, Maggiori, and Stroebel (2015), who estimate very long-run
discount rates based on modern leasehold and freehold data from London and
Singapore. Again, these findings are much lower than those reported in Jordà
et al. (2019).

3.2.4 Comparison with equities. One important finding in Jordà et al.

(2019) is that rental housing earns substantially higher risk-adjusted returns
as compared to equities. Across all countries they study, they find geometric
returns to housing to be on average 2% higher than returns on equities, but with
only half the volatility. In a follow-up paper, Jordà et al. (2019) specifically
point to a housing risk premium puzzle.
To make the comparison with equities for Paris rental housing investments,
we can employ two high-quality historic series on French equity returns. For
the period between 1809 and 1854, we use the index constructed by Arbulu
(1998), and for the years from 1854 to 1943, we use the blue-chip stock market
index created by Le Bris and Hautcoeur (2010). Both compute total returns
weighted by market capitalization.13 Over the full sample period, the nominal
log returns on French stock investments equal 6.5% per year, which is similar
to the 6.3% we find on housing. Given the larger volatility of stock returns of
12.8%, Sharpe ratios on housing (0.25) are still higher than those for equities

13 The index of Le Bris and Hautcoeur (2010) is an improvement over that of Arbulu (1998), since the Arbulu
(1998) index weights returns by the market capitalization of each industry, but averages returns across firms
within an industry, which overestimates returns at the end of the sample period. Le Bris and Hautcoeur (2010)
instead use weights at the firm level to compute total returns. Before 1854, the bias in Arbulu (1998) is likely
negligible given the low number of stocks per industry. Between 1854 and 1890, returns on both indexes are very
similar.

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 The Total Return and Risk to Residential Real Estate

(0.17). We find similar differences when we restrict our sample to the 1870–
1943 period, when Jordà et al. (2019) use the index of Le Bris and Hautcoeur
(2010), with a Sharpe ratio for housing of 0.31 relative to 0.19 for equities.
For the Netherlands, Jordà et al. (2019) use the series of Eichholtz, Koedijk,
and Otten (2000) to estimate stock returns, with an average nominal log return
of 6.3% and a volatility of 18.8% between 1900–1979. Using bond yields, this
results in a low Sharpe ratio of 0.10 relative to our estimates for Amsterdam
rental housing of about 0.35. We should note that the Dutch equity returns
and Sharpe ratios—based on the data of Eichholtz et al. (2000)—are low
compared to those in other countries in this period (Jordà et al. 2019). Given data
limitations, Eichholtz, Koedijk, and Otten (2000) estimate dividend yields in
the first half of the sample rather than actually measuring them. Some evidence

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indicates that this approach underestimates equity returns. For the 1901–1928
period, Derks (1933) reports total returns to investments in companies with
the largest market capitalizations across industries, including all dividends,
approximately equally weighting sampled stocks, and including firms that
eventually went bankrupt. The average log total return for these stocks in
1901–1928 is 6.4% relative to 4.3% in the data in Eichholtz, Koedijk, and
Otten (2000). This is similar to the return on housing for this period.
Although our improved estimates close about two-thirds of the gap in
Sharpe ratios between housing and equities that Jordà et al. (2019) report
for Paris, and about half of the gap in Amsterdam, our findings still point to
higher risk-adjusted returns for housing relative to equities.14 Beyond potential
limitations in data, we also see more fundamental explanations for this finding.
First, there were substantial transfer taxes on Parisian housing during the
period that we study, while such taxes were absent or negligible for stocks. The
transfer tax rate in Paris varied between 4% and 15% during our sample period,
averaging 6.8%.15
If we would compute yields on the basis of property prices plus transfer taxes
(so assuming an infinite holding period), property returns would fall by about
0.25% per year, reducing the Sharpe ratio on Paris rental housing to 0.21. This
is a lower bound on the impact of transaction taxes on returns. If we compute
taxes based on the median holding period in our repeat-sales sample of 9.57
years, total returns would fall by 0.7% per year. For our Parisian sample, this
would bring the Sharpe ratio on housing down to 0.17, equal to the Sharpe ratio
on equities.
For Amsterdam, transaction taxes were lower, amounting to 2.5% before
1970 and 6% after that. As a result, computing yields on the basis of sales

14 Note that Jordà et al. (2019) use arithmetic returns to compute Sharpe ratios, whereas we report here on geometric
average returns. Using arithmetic average returns reduces the relative gap in Sharpe ratios, given the higher
volatility of equity returns relative to housing returns.
15 From the Revolution to 1816, the transfer tax was 4%, after which it rose to 5.5% and remained unchanged until
1905. In 1905, the tax was raised to 7%, then to 10% in 1920 before rising to 15% in 1926. It fell to 12% in 1929
before rising again to 13.5% around 1935.

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 The Review of Financial Studies / v 34 n 8 2021

prices plus transaction taxes reduces yields only by 0.15%. Assuming median
holding periods similar to Paris, total returns would fall by 0.3% per year. This
would reduce Sharpe ratios by a small amount to 0.32.
A second key reason for this gap is that diversification is more costly for
real estate than for equities, and for nearly all investors it is impossible to own
more than just a few properties. As we noted when estimating capital gains,
estimated return volatilities increase once we base them on smaller samples, so
reducing Sharpe ratios. We will analyze the role of idiosyncratic risk in the next
section, but we will first discuss the limitations of our own index estimations,
and do some analyses of their robustness.

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3.3 Limitations
Although our indexes offer a substantial improvement over existing ones,
both because of the much larger sample and because of the application of a
consistent methodology, some limitations apply to our series of capital gains
and yields. We briefly discuss these in this subsection. We provide a more
extensive discussion and the results from our robustness checks in Internet
Appendix E.
Regarding the measurement of capital gains, the repeat-sales methodology
we employ alleviates most concerns regarding unobserved quality differences,
but a few measurement issues remain. First, we do not observe changes in the
quality of a given property over time. Our estimation method tracks the same
parcels, and given the advances in housing quality over the last two centuries,
quality changes are likely to be salient. For Paris, we are able to use the tax
registers to assess the importance of this issue and find an unobserved quality
improvement of about 0.4% per year, which implies that we may overestimate
capital gains a bit. Second, we do not observe the universe of transactions in a
city, but rely on sampling so our series possibly still overestimate the volatility in
aggregate capital gains. Our robustness tests for Paris and Amsterdam regarding
this issue suggest this leads to a slight overestimation of the capital gains
volatility. A third possible concern relating to the capital component of the total
return is that our Amsterdam index not only relies on transaction prices but also
relies on appraisals. If these appraisals deviate from actual transaction prices
in systematic ways, our results will be biased, most likely in the volatility of
the capital component. However, when we exclude the observations stemming
from appraisals, the resultant change in volatility can be attributed to the reduced
observation numbers rather than the appraisal effect.
There also may be some measurement issues in our gross yield series. To
assess the role of outliers, we compare the average gross yields to annual median
yields and find that the median gross yield levels are similar to the average
yields for Paris and slightly higher for Amsterdam. For Amsterdam, the use
of appraisals may also affect the yield series, but when we compare the series
with and without the appraisals, the yields we obtain are nearly identical.

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 The Total Return and Risk to Residential Real Estate

For Paris, our gross yield estimates are based on rent observations that are
typically not from the same year as the price observation to which we match it.
We use a 30-year matching period in the main specification, but when we reduce
this difference to 10 years, our yield estimates do not change significantly.
Another concern for the Paris data is that most yields are based on self-reported
values of rental leases in declarations of donations or inheritances, only verified
ex post by tax registrars. We assess whether our estimates deviate from actual
rents by comparing our Parisian yield series to gross yields based on the subset
of rent data coming from actual rental contracts and from gross yields we obtain
from advertisements in Le Figaro, a French newspaper. The resultant estimates
are almost identical to our main series, although the yield series based on Le
Figaro advertisements appears somewhat smoother than our succession-based

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estimates.

4. Idiosyncratic Risks
The indivisibility of assets, high transaction costs, and the capital intensity
of real estate investments hamper the construction of well-diversified direct
property portfolios.16 For markets in which investors cannot fully diversify,
theoretical studies (for instance, Levy 1978; Merton 1987) and evidence (e.g.,
Fu 2009; Eiling et al. 2019) suggest a link between idiosyncratic risk and
expected returns in the cross-section.
How relevant is idiosyncratic risk at the property level? Giacoletti (2021)
shows that idiosyncratic risk accounts for the majority of housing risk in
California and that the idiosyncratic variance is constant across holding periods.
Sagi (2020) models the price process for U.S. commercial real estate and also
finds a dominant role of idiosyncratic risk. Because of data limitations, these
and other papers (e.g., Peng and Thibodeau 2017; Eisfeldt and Demers 2018)
ignore the contribution of income to total return and risk and concentrate on
the capital return only.17 The novelty of our study is to investigate asset-level
systematic and idiosyncratic risk based on total gross returns for different
investment horizons of up to 20 years and to highlight the role of yield risk
in total return risk. Also, we broaden the geographic and temporal scope of this
discourse by using European data and by covering large parts of the 19th and
20th centuries.
Ignoring costs, the total gross log return r for a portfolio of properties of any
size i with the holding period n going from year t = 0 to year t = n is defined
as follows, with yi,t denoting log(Y ield +1) at time t, and gi,tn the log capital

16 In 1832, half of Amsterdam’s property investors owned one building only. About 90% of investors owned fewer
than five properties (Fryske Akademy 2014).
17 For commercial real estate, Peng (2016) combines capital returns and net operating income (NOI) figures to
arrive at asset-level total return estimates but does not analyze idiosyncratic risk.

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 The Review of Financial Studies / v 34 n 8 2021

gain from period 0 to period n.18


n−1
ri,tn = yi,t=j +gi,tn . (4)
j =0

Correspondingly, the variance of any individual gross property return can be

written as follows:

n−1 
V ar(ri,tn ) = V ar(yi,t=j )+2× Cov(yi,t=j ,yi,t=k )+2
j =0 0≤j <k≤n−1


n−1
× Cov(yi,t=j ,gi,tn )+V ar(gi,tn ). (5)

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j =0

Equation (5) shows that the variance of a gross housing return is a function of
the variance of the yield and the capital gain, as well as the covariance in yields
over time, and the covariance of the yield with the capital gain. In the remainder
of this section, we aim to assess each of these quantities both at the property
level and across space, with a focus on the first three terms of Equation (5).
Because we do not have dwelling-level observations on costs, we only study
gross returns. We both look at the variance of total property-level returns and
the variance of property-level idiosyncratic returns. We obtain the latter by
deflating yields and capital gains with their average market values. To address
spatial variation in yields, we will use both the Amsterdam and Paris samples.
Most of this section will be based on a subset of properties from our
Amsterdam database. For this subset, we observe transaction prices and yields
repeatedly on the same properties, resulting in 5,582 pairs of yields. Because
this information is only available for a subset of data, is difficult to estimate
each of the quantities in Equation (5) precisely, even when pooling data from
different time periods. We attempt to quantify the degree of noise in Internet
Appendix F, and also perform robustness checks.

4.1 Dispersion of yields

Starting with the first term of Equation (5), we look at dispersion in yields
across different properties. For Paris and Amsterdam, the standard deviations
of all log gross property yields are 4.2% and 4.8%, respectively. Only a minor
part of these variations in yields is due to changes in aggregate housing yields:
the volatility of residual yields after controlling for changes in market yields is
4.0% for Paris and 4.1% for Amsterdam.
Still, citywide yield estimates might not capture all systematic variation
in local yields and total returns. For instance, Giacoletti (2021) studies

18 Note that we assume that properties transact at the start of each year and that annual rents are paid directly
afterward, so that yields are earned from t = 0 until t = n−1.

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 The Total Return and Risk to Residential Real Estate

idiosyncratic capital gains risk at the ZIP code level and finds pronounced
differences across low- and high-income areas. While the historic cores of
Paris and Amsterdam are very compact and at least one order of magnitude
smaller than today’s cities, yields and returns might differ even at more granular
geographic levels.
Figure 5 displays the spatial dispersion of gross yields at different periods
for neighborhoods in both cities.19 In both cities, we find higher yields in poor
areas, in line with evidence for modern cities from smaller databases (Bracke
2015; Desmond and Wilmers 2019).
Investigating the degree of spatial structure in yields more formally, we
estimate Moran’s I statistics (Moran 1950) to tests for correlations in yields
among nearby houses. For Amsterdam, gross yields in excess of the market

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without neighborhood controls are found to be strongly correlated.20 The null
hypothesis of yields being randomly distributed across Amsterdam can be
rejected firmly (p-value: < .001). This implies that local factors introduce
nonrandom deviations from the citywide trends for Amsterdam and that
investors cannot expect, on average, the same level of yields across the city.
When calculating excess returns at the neighborhood level, the Moran’s I
test statistics cease to be significant (p-value: .29). This implies that the time-
invariant neighborhood fixed effects capture most of the spatial heterogeneity
in yields and more detailed demarcation of submarkets or more granular
neighborhood-level indexes will not improve the empirical fit. For Paris, the
Moran’s I statistic is positive, but not statistically different from zero (p-value:
.20), even before accounting for neighborhood differences.
When calculating systematic risk, we, therefore, assume persistent
differences in yield levels but similar time trends across neighborhoods.

4.2 Covariance of yields and capital gains

We now present some stylized facts about the second and third terms of Equation
(5), the covariance of yields over time, and the covariance of yields with capital
gains. To do so, we use a subset of 5,852 transaction pairs from Amsterdam
where we observe the yield at purchase, the yield at the time of sale, and the
capital gain.
Aggregating across all holding periods, we find that gross yields at purchase
have a low but statistically significant correlation of 0.13 with subsequent
capital gains, while gross yields at sale have a negative correlation of −0.21
with realized capital gains. If we compute these correlations on the basis of
residual yields, controlling both for yield differences across neighborhoods and

19 These differences are not driven by taxation. The distribution of net-of-tax yields in Amsterdam (see Internet
Appendix Figure 21) is similar to that of gross yields. The lower number of observations for net-of-tax yields,
however, does not allow for a breakdown into subperiods.
20 We find Moran’s I, which measures spatial autocorrelation, to be 0.010, with an expectation of -0.00006 and a
variance of 0.0000016.

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 The Review of Financial Studies / v 34 n 8 2021

(a) (b)

Yields, Amsterdam, 1919–1939 Yields, Amsterdam, 1950–1970

(c) (d)

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Yields, Paris, 1820–40 Yields, Paris, 1870–1900

Figure 5
Median excess gross yields, per neighborhood
Excess yields are calculated as the difference between property-level gross yields and citywide median yields for
a given year. Excess yields are not homogeneously distributed in space as clusters of low yields are found next
to high-yield areas. For Amsterdam, the deviations from the citywide averages are large to begin with, getting
more pronounced in time but tend to keep the relative ranking: the upmarket canal belt and museum areas, for
instance, persistently deliver the lowest yields right next to the high-yield, working-class Jordaan. Differences
in yields are only partially offset by higher subsequent capital gains. The correlation of asset-level yields at time
of purchase and the subsequent capital gains are estimated to be only 0.22 for Amsterdam. In Paris, yields are
more densely distributed in space but again mostly persistent in time: only the northwest experienced a distinct
yield shift. Boundaries are based on Vasserot arrondissements21 for Paris and contemporary neighborhoods for
Amsterdam.

market yields, we find stronger correlations of 0.20 and −0.46, respectively.

Thus, investors purchasing a high-yield or selling a low-yield property typically
realize higher capital gains, regardless of the holding period.
This result is partially mechanical when transaction prices are distributed
around fundamental asset values. However, the positive correlations between
initial yields and subsequent capital gains are not strong enough to flatten
out spatial differences in yields that persist in time: Figure 5 illustrates the
persistence of yield differences at the neighborhood level.22

22 At the market level, Ambrose, Eichholtz, and Lindenthal (2013) show that, while rents and prices are cointegrated,
deviations from long-run rent-to-price ratios often take decades to correct. Price adjustments account for most

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 The Total Return and Risk to Residential Real Estate

1.0
0.8
0.6
Correlation

0.4
0.2

Correlation Repeat Yields

Trend Correlation
0.0

Residual Correlation Repeat Yields, Market

Trend Residual Correlation, Market
Residual Correlation Repeat Yields, Neighborhood
−0.2

Trend Residual Correlation, Neighborhood

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5 10 15 20

Holding Period (Years)

Figure 6
Correlation repeated yields
Based on 4,371 pairs of repeat sales in Amsterdam with holding periods of 20 years or less, the correlation
of yields at purchase and sale is estimated for various holding periods (in years). In general, both yields are
positively correlated. The effect fades away for longer holding periods, with an estimated trend of -0.018 per
year (t = -3.92). The residual correlations are estimated after subtracting the median yield for the entire market
at the time of each transaction from the respective yields. Correlations of neighborhood-level yield residuals fall
more quickly over time than correlations for marketwide residuals (-0.022 per year, t = -5.32).

The question is to what extent this yield persistence also applies to individual
properties, which brings us to the second term in Equation (5), the covariance
in yields over time. If yields are very persistent over time, the yield at purchase
will have a lasting consequence on returns over the entire holding period.
Figure 6 plots the correlation in yields across holding periods of up to 20
years, based on the same set of repeated yields. Because we aggregate data
by holding period, we only have a limited number of observations for each
point in the plots, starting at 587 repeated yields for 1-year holding periods and
dropping to below 100 repeated yields for holding periods longer than 15 years.
This implies that the correlations for individual holding periods are difficult to
estimate precisely, particularly when considering that data points within a given
holding period can come from the entire 1900–1979 period. We, therefore, focus
on interpreting their trends across holding periods. Second, we also report the
residual correlation after controlling for market and neighborhood yields, by
subtracting the median yield per year and neighborhood across the sample at
the time of each transaction from the property-level yields.
Importantly, the correlation across yields over time is substantial, and only
gradually decays over time. Thus, properties with higher or lower gross yields
will continue to earn above- or below-market gross yields for decades after
purchase. Since the variation in median gross yields over time is small relative

of the eventual reversion to the mean, which is in line with the positive correlations between yields and capital
gains found in this study.

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 The Review of Financial Studies / v 34 n 8 2021

to the total variation in yields, we do not find large differences in this pattern
when controlling for market prices. However, given persistent differences in
yields across neighborhoods, we find a stronger decrease in correlations across
holding periods after controlling for neighborhood differences.

4.3 Total return risk and its components

We now proceed to estimate the contribution of each component of Equation
(5) to the variance of total returns to housing investments for different holding
periods. We can compute these numbers both based on total returns and based
on residuals returns, the latter adjusted for average neighborhood yields and
changes in market prices. To estimate these, we pool all yield pairs by holding
period and estimate each of the individual variance terms.

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We can estimate the variance of yields and capital gains for each holding
period directly, but we need to make two assumptions to estimate the covariance
terms since these contain terms that we do not observe in our data.
First, we assume that the covariance in yields on a property during a holding
period is independent of the length of that holding period, so that we can
use the observed covariance between the yield at purchase and the yield at
sale to estimate covariances in yields during holding periods. For example,
we assume that we can use the observed yield covariance for 1-year holding
periods to estimate the unobserved yield covariance between the yield in year t
and year t +1 for investments that have holding periods longer than 1 year (for
which 1-year covariances are not observed). Formally, this implies that for all
observations where k −j = m−l, Cov(yi,t=j ,yi,t=k ) = Cov(yi,t=l ,yi,t=m ).
Second, we assume that the covariance between yields during the holding
period and the total capital gain is a weighted average of the observed
covariance between the yield at purchase and the capital gain, and the observed
covariance of the yield at sale and the capital gain.This implies that the
third term of Equation (5) can be rewritten as 2× n−1 j =0 Cov(yi,t=j ,gi,tn ) =
n×Cov(yi,t=0 ,gi,tn )+n×Cov(yi,t=n ,gi,tn ).
The main drawback of this assumption is that it magnifies any noise in our
estimated covariances between yields and capital gains by a factor n. We noted
already that we have relatively few repeated-transactions per holding period,
implying that we cannot estimate the covariance between yields and capital
gains very precisely for each holding period. This noise increases for longer
holding periods when the number of observations per holding period drops.
Figure 7 plots for each holding period between 1 and 20 years the estimated
variance of the total return and its components. Figure 7a differentiates between
idiosyncratic and systematic risk, and Figure 7b shows the composition of total
property-level risk.
A clear pattern emerges. For investments with short holding periods, nearly
all risk is idiosyncratic and unsystematic risk hardly seems to play a role. But
the importance of idiosyncratic risk gradually reduces once we consider longer
holding periods.

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 The Total Return and Risk to Residential Real Estate

(a) Systematic and idiosyncratic risk

Systematic Risk
0.5

Idiosyncratic Risk
0.4
Variance

0.3
0.2
0.1
0.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

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Holding Period (Years)

(b) Decomposition of risk

200
Relative contribution to total variance (%)

150
100
50
0
−50

Cap. gain variance Yield variance

Yield covariance Yield−cap. gain covariance
−100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Holding period (Years)

Figure 7
Decomposition of total risk
Panel A compares total systematic and idiosyncratic risk based on variance, and panel B depicts the components
of total property-level risk. The residual variance is calculated in excess of citywide yield and price trends. Most
variance in the short term can be attributed to capital gains risk because the variance of yields is small relative to
the variance of capital gains. However, the importance of capital gains variance decays over time.

Importantly, the contribution of each component of total return volatility,

depicted in figure 7b, changes over time. Unsurprisingly, most variance in
the short term comes from capital gains risk, because the variance of yields
is small relative to the variance of capital gains. However, the importance
of capital gains variance decays over time, and yield covariance becomes an
increasingly important component of total return risk.23 Because the correlation

23 This pattern also persists when plotting residual yields and adjusting for neighborhood yields and market price
changes in Internet Appendix Figure 22.

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 The Review of Financial Studies / v 34 n 8 2021

between yields and capital gains is positive for the yield at purchase but negative
for the yield at sale, we do not find large aggregate impacts of the covariance
between yields and capital gains. Because the negative correlation outweighs
the positive correlation, this covariance is negative on average but moves over
time due to estimation noise.

4.4 Implications
Taken together, these results have two important implications for our under-
standing of the risk and return of individual properties. First, nearly all short-
term investment risk at the property level is idiosyncratic, but the fraction of
idiosyncratic risk decreases with the holding period, as changes in marketwide
trends of capital gains and yields become more important in the long term.

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This also implies that the impact of idiosyncratic risk on total return volatility
changes across holding periods. For the average holding period of 10 years, we
find property-level gross volatility of about 50%, including idiosyncratic risk,
relative to systematic return volatility of 32%.24 Thus, if we would compute
Sharpe ratios on the basis of property-level gross return volatilities, they would
drop by about 35% when including idiosyncratic risk. However, the impact of
idiosyncratic risk on Sharpe ratios is even larger for short holding periods. For
example, the 3-year total gross property-level return volatility in our sample
is about 32%, whereas the systematic 3-year volatility in the sample equals
about 15%.
If idiosyncratic risk followed a random walk, the idiosyncratic variance of
total returns would scale exactly by the holding period (and volatility by the
square root). Sagi (2020) and Giacoletti (2021) soundly reject this assumption
for the idiosyncratic risk of capital gains, and our sample of capital gains
confirms this finding.
However, due to the persistent positive covariance in yields, we document
that this effect is gradually compensated over time by the increasing importance
of yield risk in total idiosyncratic risk. Although idiosyncratic return risk
increases more steeply over holding periods when also including yield risk,
the idiosyncratic risk still does not scale fully with the holding period.
For example, the 5-year idiosyncratic variance of total returns is about 0.1
(volatility of around 30%), while this increases to about 0.25 for 20-year
periods (volatility around 50%).
Second, and most importantly, we document that persistence in property-
level yields is a crucial risk component for investors, especially in the long
run. This implies that for a long-term investor the initial yield is a much more
important source of risk than for a short-term investor, who primarily bets on
capital gains. Basically, rents are sticky and will not quickly revert back to their

24 Note that the number of 32% slightly differs from the 37.8% reported in Table 4. This is because the figure of
37.8% is based on all data covering the entire 1900–1979 period, whereas the 32% is only based on the small set
of repeated observations with a 10-year holding period.

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 The Total Return and Risk to Residential Real Estate

economic fundamentals in case of deviations at purchase. A small part of this

persistence can be explained by differences in yields across neighborhoods.
Another factor that could be causing these yield differences are structural
differences in nontax costs across properties. However, representative long-
term data on these costs are difficult to obtain. With short-term data from
Milwaukee, Wisconsin, Desmond and Wilmers (2019) show that gross yields
are higher in poor areas and that less expensive rental units face higher costs, in
line with our evidence for Amsterdam. However, they find that landlords still
earn higher net rental returns in poor areas.
We again want to note that our estimates of the variance components and
yield correlations contain noise when estimated for individual holding periods,
because of the more limited samples we have available. In Internet Appendix F,

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we discuss this issue in more detail, quantify some of the uncertainty in our
individual holding period estimates, and present robustness checks, considering
a sample excluding appraisal data and splitting the sample in the pre- and post-
WWII period. The trends we document across holding periods are robust to
considering these alternative specifications. If many more observations were
available, one could estimate capital gains indexes at the neighborhood level
and fully separate marketwide risk, neighborhood risk, and idiosyncratic risk.
Some of the variation in capital gains that we still account for as idiosyncratic
risk would then likely be captured by a neighborhood risk factor.

5. Conclusion
This paper creates new indexes describing the net total returns of rental housing
for extended periods and compares these to returns reported in recent work (i.e.,
Jordà et al. 2019; Chambers, Spaenjers, and Steiner (2021)). We create total
return indexes for Paris and Amsterdam, for the periods 1809–1943 and 1900–
1979, respectively. These indexes are based on previously unexplored archival
data that we hand-collected and digitized for this study. Our unique contribution
lies in the fact that we observe rental yields and values for the same properties,
and that we have enough observations to use a repeated measures approach to
reliably control for changes in asset quality.
The first main finding is that the geometric average net total return to
rental housing is 6.3% in Paris and 8.0% in Amsterdam. These returns come
with considerable volatility of 8.6% and 10.3%, respectively. We show that
using actual rental yields and capital gains for the same set of properties is
essential to obtain reliable estimates of housing return and risk. Relative to
Jordà et al. (2019), who use secondary series, we find substantially lower risk-
adjusted returns to housing for both cities and a low correlation with their total
return series. This confirms the conclusion of Chambers, Spaenjers, and Steiner
(2021).
We show that most of the real long-term total return to rental housing stems
from the net yield, and that capital returns are small and even negative in real

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 The Review of Financial Studies / v 34 n 8 2021

terms for Amsterdam. This is in contrast to Eisfeldt and Demers (2018), who
find a more important role for the capital return.
Besides these findings at the index level, our study also makes important
contributions regarding property-level investment performance. Our findings
regarding the geographic dispersion of rental housing performance and the
importance of the holding period show that the yield at purchase is a key
determinant of the holding period return at the individual asset level. We find
that yields are persistent, even over holding periods as long as 20 years.
Regarding the composition of total return risk, we find that the idiosyncratic
risk is the dominant part of total risk in the short term, but that the importance of
market risk increases over the holding period. Moreover, we show that variation
in the capital gain is the dominant factor in total asset risk only in the short

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term. For holding periods going up to 20 years, yield covariance becomes as
important.

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