Housing Prices over the last 380 years.

Thanks to the Dutch who are meticulous record keepers, I discovered a great data series showing housing prices in an area of Amsterdam over the last 380 years. With debate about the real estate boom in some Australian cities, I thought this index may offer some insights into what we can expect in the future.

The property index tracked the price of houses along the Herengracht canal in Amsterdam (‘the Herengracht property index’). If people know the area, this is one of the best areas of Amsterdam to this day (think Rose Bay in Sydney) and has remained consistently so over the last 380 years. Currently, houses now sell for about 1m Euro and go up to 3m Euro for the larger properties. This makes the index unique and interesting, as the area has not fallen in and out of favour over this period, and is arguably not contaminated by large changes in land use.

So, what does the data tell us about how housing prices change over time:

1. The index shows housing prices increased by 0.1% per year over the 380 year period in real (inflation adjusted) terms. So, if inflation is ~ 2.5%, expect housing prices to increase by 2.6% into the future. The long and short of it is that housing prices roughly follow inflation (well, only 0.1% difference).
2. The data does not support the view that housing prices will rise by substantially more than general inflation over an extended period.
3. The above 2 points do not suggest that real estate is a bad investment. Quite the opposite. A buy and hold investor who bought in 1620, and enjoyed 4-8% rental yields over the 380 odd years has probably done pretty well. Yep, housing is not just about capital growth, but yield as well. Unfortunately, the index does not readily track yield but anecdotes suggest it was in the 4-8% range.
4. There were many short periods of less than 5 years where property prices doubled (1628-1633), corresponding to a period when the economy of Amsterdam was booming. Not dissimilar to recent booms in Melbourne and Sydney. But this was not sustained over longer periods and does not represent the norm.
5. Property prices fell by over 50% on 4 separate occasions: Louix XIV invaded in 1672 (68% drop), Napoleon invades in 1794 (74% drop), beginning of World War 1, Great Depression in 1939 & Hitler invades in 1940. There were other large drops in prices over the 380 year period but less than 50%. For example, property prices dropped by 38% following the outbreak of the plague.
6. The index shows that property prices have large periods of growth over 50 years, but this is generally followed by sustained declines that also extend for periods of 50 years.

Who thinks this index tells us something about how property prices change over time? Who thinks the the really bad stuff of the past (plague, wars, invasions, etc) have any modern day equivalents (nuclear war, global warming, terrorism with radiological devices), that could similarly drop property prices by 50%?

Views and debate welcome!

 

So buy and holding is a good way to become an average successful investor but if you want to become an exceptional investor you have buy and sell at the right times?

 

Is the data available for public viewing?

 

All publicly available. See attached.

 

There have been some other studies like this, including one by Robert Schiller which I think found real growth was only about 2% or so over 150 years, when you took income growth and inflation into account. It was another European study. I think what it really highlights is it's critical to look beyond capital growth.

 

I think it shows what happens to blue-chip property in a blue-chip country on a blue-chip continent. It shows that you need to buy before it is blue-chip, hold during a few growth spells, and then either live in it and enjoy, or sell at peak if possible.

 

I know Robert Schiller based a lot of his book on this index. He may have made reference to other indexes.

 

Really great post and very insightful.
To answer your last question though then absolutely Yes. There will forever be major events that change the world and will flow into all respective markets.

I always laugh when I read people’s comments that “yeah but that’s because of this and that’s because of that, those things won’t happen again”.....Sure maybe those actual things won’t happen but their are always going to be market distruptors both good and bad.
I think in the next 20-30 years we will see some real disruption to city prices when access from regional towns becomes much simpler and affordable.
Think fast rails (come on Gov you can do this!), self driving cars, incredible internet speeds from regional towns, even very cheap flights (maybe even pilotless drones but that may be further than 30
With the evolution of tech and most importantly the internet it also means businesses won’t need to be located in the CBD and can instead set-up more regional reducing the huge expense of CBD rental income.

Point is that’s just one distruptor we know of and I could list more. Then there is ofcourse everything we don’t yet know. Who knows we may colonize Mars by then. Could own your very own patch of red dust.

 

The game changer for real estate prices has been the availability of (reasonably) cheap debt. I believe that it's here to stay and a new baseline would have to be established, but I agree that if availability and cost of debt remains similar, in the long run land prices (not quite the same as property prices, I know) will increase at the following rate: inflation*(1+population_growth^n)
I'm not sure what the exponent of n will be, but again in the long run it's likely to be around 1, maybe a little bit more.

Just my theory though.

 

Debt is cheap but access to cheap debt is hard. Most people who could borrow many multiples of their wage now simply cannot do so. I think that's going to restrict price growth for a long time. I don't know of anything on the horizon that is going to make future borrowing easier.
So to reiterate @euro73, I'm calling this the new normal.
Prices will flatten in the short term, long term - I don't know what will make prices rise.

@albanga - Not sure how many established Sydneysiders will move to the country for cheaper housing even if they have fast internet speeds.
Certainly in Sydney more and more apartments can be built, and people can get used to living in apartments rather than houses. At least apartments tend to be convenient and hassle free. I don't think Sydney needs to get any larger in terms of geography. Commuting is a killer. Not sure if/when fast intercity trains will come in.
Certainly driverless cars will, but then again I feel that people tend to like living close to the city, near to family and friends.
Horses for courses though.

 

Even apartments in Sydney are pretty overpriced though. They need to be like 30% of the price of a house in the same area at the most to make sense financially for most people (accounting for the lack of land which makes up most of the value). At present they are 60-70% in many areas. There's not much of a discount. They need to get to half the current price to get take up on any significant level

 

yes

 

Really? Let me ask you a question then.
How many employees at your company now have the option to work from home even for 1 day a week? Our office I would say have 20% of staff now working atleast 1 day from home and that is with bad internet.

If I asked you that 10 years ago how would you respond? The answer would pretty much guaranteed to be 0 (unless they were part-time). A shift to ADSL2 (still horrendous internet) started to make it more viable. We are now going through a major shift to cloud based solutions. I am currently rolling my entire company onto Salesforce and Outlook 365 which basically means most of their CBD based infrastructure simply isn't required anymore = more people can work from home with nothing more than an internet connection which is still slow but heaps faster than requiring a VPN.

Their is simply becoming less and less of a reliance to need to commute into the CBD to now do your job and that is with Horrible internet by world standards.

The number 1 reason people are located near the CBD is work.
Family is just their as part of reason 1 and I would argue that if their was less reliance to be there that a lot of friends and family would make the same move. I can say with 100% certainty that my family and all my close group of friends would move away from the CBD if it was viable (we talk about doing it now when its not viable!).

Lets use a hypothetical.
Say in even 15 years time that we had super fast internet and a fast rail connecting Melbourne to Sydney with stops in key regional towns along the way.
By then we can comfortably say that unless you are fully client facing that you can probably do 3 days per week from home.
So now we need to make the commute into work only 2 days and with fast rail it might take you 1 hour.

So are you and your families all still living in the CBD? Or are you moving to a regional lets say Echuca where the weather is much warmer, much more laid back and houses half the price?
Even if im 90% wrong, demand has still lowered by 10% in the CBD. My guess is im at least 50% right.

 

A big GAME Changer

In my opinion will autonomous vehicles.

This is within 20 year at most.

If you live on the coast and get in the car have a snooze and wake up at your palce of work. Or work on way this is game changer.

Parking requirements will be greatly diminished.

Driveways as we know it will not be needed.



20 Years ago say 1998.

DID any one picture what the internet /mobile technology would to to the world.


How many industries changed. Think photography/ Fax machines/ Public telephone booths/ Construction. Transportation / Freight,Taxi industry

Every industry has been touched by technology and its fast

 

But most jobs aren't in the CBD, they are scattered all across the suburbs and outlying areas of the major cities. And decentralisation enabled by high speed rail will probably remain a pipe dream

 

At last check their are around 1,000,000 people that make the weekly commute into Melbourne CBD which is just under 1/4 of our population.. I am unsure of the percentage of those which are for work but you would say its majority.

It is the professional sector where we sit at our desks all day staring at a computer that simply are having less and less reliance on being located in the CBD. Sure your correct that more jobs in total would be in the outlying areas but how many of these are to serve the people living their because they have to?

 

Inner city Sydney and Melbourne land will continue to appreciate as the infill of medium to high density housing continues. As soon as land gets rezoned, the price rockets and has an effect on surrounding areas that may be next. The latest NSW state gov planning regs will have that effect once the local councils get on board. Which is only a matter of time (could be a long time, but still, it will happen).
Yes more work form home may have an effect, but I still see cities getting bigger in the future, not smaller.

 

Might as well through teleportation into the mix. Now that will be a real game changer.

In 20 years we have bigger problems like very few full-time jobs and governments moving to a living wage system.

 

Well yes a lot of them will be service jobs which will naturally need to be close to the population. There is manufacturing as well which may be a bit more amenable to decentralisation if there were a lot of government incentives. Remember the trend is very much for our largest cities to keep growing (lust look at the stats of where migrants end up).

 

I just bought a book "Idiots guide to investing", along with a calendar with 380 years on it. One day down, 379 years, 364 days to go. Gotta think long term. Who's with me?