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.
Yale economist Robert Shiller - who is famous for his work on speculative bubbles and housing markets - was just awarded a Nobel Prize in Economics.
By way of his Case-Shiller Home Price Indices, he has argued that from 1890 to 2012 home price appreciation in the US (in real terms) has been basically zero. It has been flat:
As a result, he’s been very critical of the notion that homes should even be thought of as an investment. In this interview, he says the following:
“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000’s. And I don’t expect it to come back. Not with the same force. So people might just decide, "Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.“