VFF sees ‘unrealistic faith’ in Norwegian property market

VFF, the Norwegian Fund and Asset Management Association, has published a survey, which it says points to an unrealistic faith in the domestic residential property market’s ability to produce better risk adjusted returns than equities.

The faith in property is contained in a survey done on behalf of VFF, which suggests that Norwegians believe residential property will provide better returns than equity or fixed income funds over the next five years. At the same time, the respondents to the survey said they believe the property market does not carry significantly more risk than either type of fund.

“This shows that many Norwegians underestimate risk in the property market. Every investment that has gained as much as the property market has in the past 20 years, is by definition linked to relatively high risk,” said Lasse Ruud, chief executive of the Association.

Many Norwegians believe that residential property has served up a stronger gain than equities, but figures from VFF and the Norwegian Association of Real Estate Agents from 1985 to the present do not show this. This is because property price indices do not capture rents, maintenance costs, or other changes that have taken place, which means it does not provide a firm basis for a comparison between equities and property over the period, VFF said.

“The Norwegian equity market value has gained more from 1985 to today than the property price index. Global equities have offered an unnaturally poor return over the same period, which have made them weaker than the property price index,” Ruud said.

Another issue in comparisons between asset classes is leverage.

Many Norwegians have had a high level of loans against their residential property. As these properties have gained in value the return on their own capital seems much higher than the development in actual property prices.

But it is wrong to compare a leveraged property return with a non-leveraged return from equity, Ruud said, adding that it was probably the loans on properties that have left many with the idea that property have made better returns on their own capital than equity funds over the past 20 years.

To review the survey results published by VFF, click here:[asset_library_tag 7130, Fondsundesøkelsen 2013]

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