馃馃徑 BONDS vs REAL ESTATE 馃馃徑
Perhaps, after the Debt and Stock Market, Real Estate is the most popular sector because of it is usually watched as another safe heave asset (excluding gold). The logic of operation is similar to that of debt: the property/debt has a value for which it receives an amount of money (rent or interest) every certain period. In fact, both are also subject to supply and demand which affects their value, either by the creation of more property or debt, and by the desire to hold these instruments.
In inflationary times, owners can receive more from their properties (in the case of debt, there are instruments with higher interest). The problem is that the housing value is tending to fall because it will be increasingly difficult to buy due to the erosion of purchasing power caused by inflation (in the debt, the value of bond fall because there are another instrument with better interest). The oposite happen when inflation falls.
Therefore, as they have the same logic, what is the relationship between the two in terms of performance? In order to simply this complex subject, ETFs were chosen. The first, XLRE tracks the US Real Estate sector. The second, TIP tracks the performance of Treasury Inflation-Protected Securities (TIPS are bonds that are indexed to inflation, which means that their principal value is adjusted up or down based on changes in the Consumer Price Index). The downside is the asset allocation and maturity of each, the upside is that it allows for easy comparison and liquidity for any investor.
Based on a 5-year sample of monthly price movement returns data (60 items), there were a correlation of ≈ 52.14%. This means that the impact of the Real Estate sector was explained by TIPS behaviour in ≈ 27.19%. In linear terms, every 1% return in TIP impacts on real estate returns by ± 1.52x (REITS are more sensitive than Bonds and Treasury).
It could be relevant because of the uncertainty of interest rate and inflationary spikes, plus the market's penalisation of the sector [ SP500 ]. Finally, it is an easy comparison and each asset should be valued individually according to its maturity (debt) and location and other conditions (property).
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J. Joel Padilla
Copyright: Joel Padilla 2023
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