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News : Property Last Updated: Jan 27, 2015 - 2:29 AM

Real price of Amsterdam house only doubled in more than 350 years
By Michael Hennigan, Founder and Editor of Finfacts
Mar 16, 2010 - 5:13 AM

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The real price - - on constant currency value basis calculated by stripping out inflation  -- of an Amsterdam house has only doubled in more than 350 years according to an IMF research article.

Prakash Loungani says that in 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighbourhood. As the Dutch Republic rose to global power in the 1620s- -with Amsterdam developing the world’s first major stock market as well as commodities and futures markets- -the price of the house doubled in less than a decade. Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths. When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment.

In his 2007 book On the Wealth of Nations, Irish-American writer P.J. O'Rourke recounts a joke picked up from longtime chief economist of the New York Stock Exchange, William Freund: "An economist is a fellow who knows 101 ways to make love and doesn't have a girl."

Just over 150 years after Pieter Fransz built his house, Scottish philosopher-economist Adam Smith wrote in the Wealth of Nations, which was published in 1776: "A dwellinghouse, as such, contributes nothing to the revenue of its inhabitant; and though it is, no doubt, extremely useful to him, it is as his clothes and household furniture are useful to him, which, however, makes a part of his expense, and not of his revenue. If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue which he derives either from labour, or stock, or land. Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it."

Maybe, just another non-financial service economist talking down the economy!!

A boost to housing of course can have a short-run economic impact and it's akin to what the renowned British economist John Maynard Keynes had in mind in his seminal 1936 book, The General Theory of Employment, Interest and Money, when he wrote, in tongue-in-cheek mode: "If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled up with town rubbish, and leave them to private enterprise on the well-tried principles of laissez faire to dig them up again - there need be no more unemployment and, with the help of the repercussions, the real income of the community and its capital wealth also would probably become a great deal greater than it actually is!"

Loungani says viewed over the long sweep of history, the distinctive feature of house prices in Herengracht has been not the trend but the cycles. He says starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline.

The economist says that between 1970 and the mid-1990s, the average upturn in house prices in 18 OECD economies lasted just over five years, during which real (inflation-adjusted) prices increased an average of 40 percent . The subsequent downturn typically lasted four and a half years, and prices fell about half as much as they rose during the upturn.

Loungani says the past offers a prism through which to view the present house price cycle, which started sometime between the mid-1990s and early 2000s for most countries. The upturn in this most recent cycle lasted twice as long on average as those in the past (41 quarters compared with 21 quarters) and was more pronounced, with prices rising nearly three times as much. He says the ongoing downturn is approaching the duration of past downturns, and the fall in house prices thus far is nearing the amplitude of past downturns. But because prices rose much more sharply than in earlier upturns, their decline might eclipse those observed in the past.

Loungani says though there are some signs of stabilisation, the global correction in housing markets continued through 2009. House prices in the OECD economies fell on average about 5 percent in real terms between the fourth quarter of 2007 and the third quarter of 2009. However, the data suggests that with the exception of the US, prices have further to fall.

First, house prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Second, house prices remain above rents and incomes - - often used as long-run anchors for prices. Chart 5 (above) shows how much farther the ratio
of house prices to rents and incomes would have to fall in each country to bring it down to its long-run average. Third, econometric models show that house prices increased during 2000–06 to a greater degree than can be explained by either short-run driving forces or long-run relationships: the corrections thus far have not erased all of the excesses generated by the house price increases. The economist says that leads to an uncomfortable conclusion: house prices in many countries still have room to fall.

Prakash Loungani: Housing prices - - More Room to Fall? (pdf)

More on this Dutch house from The New York Times Magazine 2006.


Finfacts article, Oct 2006: Global Survey: Cost of typical management level house in Dublin, Ireland, could buy 9 similar houses in Houston, Texas, 3 in Amsterdam, 2 in Sydney and almost two in Tokyo

Finfacts article, Feb 2008: International House Price Comparisons 1970-2006: Irish price growth in 36-year period third highest among 18 Developed Countries

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