housing prices in the long run

For reasons that are not clear to me, investors invariably overestimate the returns from housing, and underestimate the variability of returns. No, TdJ readers, assets do not always appreciate. Housing can depreciate if it is not maintained, and sometimes even if it is.

Here is a recycled TdJ from 2006 that is still relevant today.

From the time the Herengracht was developed in the early 17th century … it has been Amsterdam’s prime real estate…. Looking at real-estate transactions over four centuries on this canal … gives a quality constant of unparalleled duration.

This is what attracted Piet Eichholtz, a professor of real-estate finance at Maastricht University in the Netherlands, to study the Herengracht in the 1990’s. ….

The most surprising thing about Eichholtz’s study is that it contradicts a maxim of the real-estate profession. ….

Between 1628 and 1973 (the period of Eichholtz’s original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As [Yale economist Robert J.] Shiller wrote in his analysis of the Herengracht index, “Real home prices did roughly double, but took nearly 350 years to do so.”

Russell Shorto, “Amsterdam House: This Very, Very Old House”, New York Times Magazine, 5 March 2006.

This refers to long-term price changes. In the short run, there was a lot of variation. For example: “In the five-year period between 1628 and 1633, as the economy soared, the real, inflation-adjusted prices of houses on the Herengracht doubled.”

The original (August 1996) essay, by Piet M. A. Eichholtz, is “A Long Run House Price Index: The Herengracht Index, 1628-1973”. It can be downloaded at SSRN.


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