In the comments of my recent post about Manhattan real estate prices during the Great Depression, a regular reader of this blog shared this terrific blog post (and corresponding research paper by Piet Eichholtz) about house prices along the Herengracht canal in Amsterdam from 1628 to 1973. Later it was updated to include up to 2008. It’s a long run house price index.
Probably the first thing you’ll notice is that the index is highly volatile. Amsterdam enters its Golden Age, creates the world’s first stock exchange, and becomes the wealthiest city in the western world – house prices go way up. The tulip mania bubble pops – house prices go way down. It’s not until after World War II that prices sort of start to stabilize and increase, maybe, more consistently.
In nominal dollars, the house price index increases 10x over the study period. But in real dollars most of that disappears. The biennial increase (that’s how the study was done) over the same period of time is just 0.5%. That translates into a doubling of house prices, which may seem quite good, except that remember it’s over a 380 year time period.
The Herengracht canal is a particularly good study because it was and has remained (or so I’m told) a desirable part of Amsterdam. This is an attempt to control for the variable that maybe some of the volatility could be explained by the area simply falling out of favor. (As a quick sidebar, the Herengracht was one of the first canals laid and dug out around the original city center of medieval Amsterdam during its Golden Age.)
Generally, this finding is in line with one that economist Robert J. Shiller famously published a number of years ago where he argued that, when you correct for inflation, home prices actually look remarkably stable over long-run forecasts. In one study, he looked at 100 years of US home prices ending in 1990. Real home prices increased about 0.2% a year. What an outstanding hedge against inflation.