Secrets from the oldest housing index in the world - Amsterdam
The market’s booming in Sydney.
Crazy prices being paid.
It’s likely to pull up at some point. (At time of writing, the “snap” COVID lockdown may do it!)
Sydney tends to peak earlier in the cycle due to affordability constraints.
This eventually limits the number of buyers able to compete.
It leads to more supply than demand.
Other states then gain from the outward ripple of buyers. (As I deconstrued in this monthly edition)
But for the time being the city’s real estate market is roaring.
Last Saturday a colleague sent me an off-market result.
25 Bowden St, Ryde (13km northwest of Sydney)
It’s a knockdown house – unliveable.
Land value only.
Take a look…
Source: - McGrath, Ryde
The site sold for $1.680M.
That’s a massive result for the area.
The last council valuation record (taken in 2020) for the unimproved value of the land came in at $823,000.
Not even close to the land’s current market value based on this result….
However, bear in mind that you can’t do much with this plot.
It’s under 500 sqm with a 12m frontage (narrow).
It also sits in low density zoning.
At best, this is a new home site only.
The future value of the block reliant on someone coming along and paying more in ‘X’ number of years’ time.
A flip in other words.
If a new home is constructed on top, the value will be increased.
But without the ability to subdivide, the return on investment is minimal.
Regardless, the above result is just one sign that we’re in for an almighty boom.
Confidence in the market remains high.
Likely this block will perform well until we reach the peak of the cycle (2025/6).
Then - depending on the extent of the crash at the end – the asset risks losing all its accumulated speculative value.
Keep this in mind as you read through the real estate secrets uncovered in this edition.
- We’ll take a dive into the oldest housing index in the world to see what lessons can be gleaned from speculation on real estate flips.
- Using this index, I’ll demonstrate how you can make significant wealth from flipping. But (!) only if you understand the timing of the 18.6-year cycle.
Get it wrong, and you’ll risk losing everything.
- I’ll finish off by highlighting what it means for real estate investors today.
Bottom line – the key really is in timing the market!
The oldest housing index in the world
Most real estate indexes only go back over decades – to the time when transactions started to be recorded in digital form.
Some analysis have delved through historical archives to laboriously extract a longer series of data for various regional areas.
However, the one we’ll focus on today is the oldest.
It charts over 350 years of housing data.
That makes it an extremely valuable document for several reasons, (which, I’ll highlight below.)
Few know of its existence, let alone its significance to the study of the 18.6-year cycle.
It was put together by real estate finance professor Piet Eichholz of Maastricht University.
Eichholz was frustrated by the tendency of papers to make assumptions on housing cycles with short-term data.
The problem is that most short-term indexes conclude that values in prime city regions go up significantly over time – the longer you hold the better.
Who hasn’t heard real estate moguls spruik - it’s “time in the market, not timing the market that counts”?
Eichholz – who was somewhat of a housing bear – set out to prove the opposite.
"If you look at most research on real-estate markets, papers will typically say they are taking 'a long-run look and then they go back 20 years.
I wasn't impressed with that.
I thought you had to go back further to get a really good picture of what a housing market performs like.” (Interview with Eichholz in the NY times - 2006)[CC1]
The index Eichholz compiled is called the Herengracht index.
It follows the change in real estate values along a “prime strip” of the Herengracht Canal in Amsterdam.
What’s so special about the Herengracht Canal?
The Herengracht Canal is considered the most important canal in Amsterdam.
Even today, an address on the Herengracht is seen as a prestigious statement of wealth.
It’s home to the city's mayor, bankers, lawyers, and celebrities.
In the 17th century, the richest merchants, most influential regents, and mayors of the city lived along this canal.
The strip features some the oldest houses in Amsterdam – dating back to the 1600s.
An era when Amsterdam was the financial kingpin of the world.
To give some context - prior to the 1600s, wooden homes were the norm.
However, almost all were wiped out by three major fires.
This led to a ban on wood being used for construction and from the 1600s onwards.
Only brick and stone houses were permitted.
The houses along the canal were constructed by master builders who sought to display the aspirations and wealth of their occupants.
The picturesque skinny terraces also functioned as viable quasi-commercial units.
Napoleon and Hitler both had their turn at conquering Amsterdam over the centuries.
However, due to the building materials, and quality of construction, these homes have endured throughout.
Their reflections in the canal still gift a picturesque scene for the millions of tourists that transit through the city every year.
(Or at least they did prior to the COVID panic!)
Source: Lorena Cirstea_Photography [CC2] - (Herengracht Canal - the second house in from the left is the oldest residential house in Amsterdam - constructed 1590)
They key here, is that the Dutch have always been meticulous recordkeepers.
Transactions of these homes (and others along the Grand Canal) have been carefully recorded through the centuries.
However, the Herengracht index is considered unique for reasons other than merely its age.
What’s so special about the Herengracht index?
Modern indexes are required to adjust for changes in housing stock.
For example, as extensions are added, or as properties upgraded and replaced – this needs to be accounted for.
Keeping an accurate record of median changes in the locational value of land therefore is challenging – it can easily be skewed.
As with the above example in Ryde, valuation records can also be very inaccurate compared to the market price buyers are willing to pay.
This is a big issue in Australia.
It’s one reason you can never trust median rises in house prices to record accurate changes in values.
To do so, they need to be based on a high volume of very comparable sales eliminating new builds.
The Herengracht Index on the other hand, shows a series of repeat sales figures for a small but significant strip of real estate that has seen minimal changes over the centuries.
High density terrace housing with very little room to extend or add to the interior space.
Yet it’s a strip of land that has always attracted speculative capital.
The benefit is that it records closely the locational change of value only!
In other words – constant quality real estate flips.
This gives us good record of the booms and busts affecting the region.
Also - the other important point is that this index has been adjusted for inflation.
It corrects for rising consumer prices (but not wages.)
It shows *real* house prices, rather than nominal.
This to some extent this proves the point Eichholz intended.
Over the period that the index covered at the time of Eichholz’ study (345 years) - in nominal terms housing values increased “more than tenfold.”
A bi-annual increase of 11.6% for the period.
In real terms however, the increase from first sale to last, is largely insignificant.
After 345 years of market cycles, the inflation-adjusted cost of housing only increased 3.2% – leaving the real value broadly the same.
You can see this demonstrated on Eichholz’ charts below.
Figure 2 Nominal changes in housing values – Figure 3 Real changes(Source: A Long Run House Price Index: - The Herengracht Index, 1628-1973)
The key for the owners along the canal, was knowing the cycle well enough to time both the purchase - and the sale.
Those that did could have made a windfall.
Those that didn’t – lost everything.
Eichholz’s warning for all real estate speculators
To demonstrate - number 150 Herengracht changed hands many times:
Abraham Mylius bought the house for 5,100 guilders in 1755.
Yet over a century later, when shopkeeper Johan Hendrik Louis Dreckmeijer purchased the property, the “real” price tag was the same!
In Eichholz eyes, stories like this serve as a warning for all real estate speculators.
For our purposes (and the owner of the block in Ryde) it underlines the importance of “timing the market” rather than “time in the market.”
Many major incidents affected the local region over the period – interrupting the cycle of boom and bust.
Most significant was the crash following the French occupation in 1795:
House values along the Herengracht canal tumbled by.80% - the city's population shrank 20%.
"It was a period when everything was bad: war, a major economic crisis, a major demographic crisis," (Eichholtz - 2006)
The Herengracht Index updated to 2020
The Herengracht Index starts in the very early 1600s.
Eichholz extended the data to 1973.
Others have updated it to 2020.
Over 390 years of data.
Below is version of the index updated to 2020 that highlights some of the major events affecting the region.
Source: – Herengracht Index updated by Matthijs Korevaar - Assistant Professor of Finance at Erasmus School of Economics.
Source: – Herengracht Index updated by Matthijs Korevaar - Assistant Professor of Finance at Erasmus School of Economics.
A couple of points to take from the updated chart.
Real prices today are over 100% higher than during previous highs (in 1664, 1736 and 1900) - with 6% y-o-y price growth since 1985.
A feature of modern monetary and lending policies.
However, looking at bond yields - prices in Amsterdam may be at historical highs, but not at historical highs relative to interest rates.
A closer look at the booms and busts on the Herengracht Index in context of the 18.6-year real estate cycle
Let’s take a closer look at the booms and busts on this index and test them against our 18.6-year real estate cycle.
If we can find a correlation – it should give readers confidence what we’re forecasting over the next few years here at Cycles, Trends & Forecasts will occur.
The start of the index covers a time historically remembered as the Tulip bubble.
A period during the Dutch Golden Age when contract prices for Tulip bulbs reached unbelievably high levels.
It’s generally considered to have been the first recorded speculative bubble in history.
The world's first major stock exchange came into existence around this time – centred in Amsterdam.
Commodities and futures markets were also developed and perfected.
The historical focus centres on Tulips as the cause of the bubble.
But it in fact had far more to do with land.
Real estate flips sat behind the funding.
Several drivers fed into it.
The city’s population doubled in 20 years.
Leaders authorised one of the earliest and most far-reaching urban-planning schemes in history.
They mapped out three concentric canals and dividing the land around them into housing lots.
It was a massive undertaking that doubled the size of the city.
Unsurprisingly, the lots were snapped up by speculators.
Residents flipped their houses at “ruinously low prices” to raise funds to invest in tulip bulbs.
One man offered 12 acres of land for a rare specimen.
Foreigners took the bait and poured funds into the real estate market - vastly inflating the locational values of the premium lots surrounding the canal.
Tulips sold for approximately 10,000 guilders.
Equal to the value of a mansion along the Grand Canal!
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 peak of the real estate bubble as recorded on the Herengracht index, is 1633.
All came to an end a few years later in 1637.
Both the tulip and real estate bubble burst - coinciding with a plague that killed 20% of Amsterdam’s population.
Punters were no longer able to pay high speculative prices.
Land prices plummeted back down to the same level the index started at in real terms – and fell by more than 50% in nominal terms.
Real estate speculators made a fortune and lost a fortune.
Let’s take this date – 1637 - the first recorded bust on the index - and see how it pans out over the centuries, in line with the 18.6-year cycle.
(If you are wondering why we are using “18.6 years” rather than 18 years – I share the secrets in this monthly edition”)
I’ve used the historical date of the bust to test the data, because the exact real estate peak of any regional market can vary dependant on local events.
In other words, 14 years up, 4 years down in land values – is just an approximation.
The peak for real estate values historically can push into 16 years – or fall short and ‘soften’ prior to a collapse.
Simply – the real estate market is not as reactionary as equity markets.
However, the economic recession at the end of the 18.6-year cycle will always occur close to a sharp downturn in real estate values.
This is what we’re going to test on the index.
Here are the dates I’m going to highlight on the Herengracht chart.
1637 + 18.6 (and so forth)
I’ve plotted the dates on the index showing that they fall at – or close to (i.e. a year either way) – a sharp downturn in the Herengracht canal’s real estate values.
I’ve used a version of the index that culminates in 2008 simply because it makes it a little easier to pick the dates along the “y” axes.
Here’s the result..
Source: The Eumaecus Project [CC3]
As you can see, for the most part, these plotted dates coincide with significant downturns in real estate values along the canal.
Local events had an impact - either reducing the gains made, or inflating them
Recessions, plague, and war all interrupting the cycle so to speak.
However, the sharp downturns in the real estate values at the end of the cycle are clear.
What of today?
As for today – as I said at the start o this edition, the real estate market is on fire in various regional locations – both here and worldwide.
Source: ABC news
Many commentators are wondering how long it’s going to last.
The last date on the list above is 2027.
It marks another sharp downturn in values – both here, and overseas.
In other words, you can be confidence based on data from the oldest index in the world, that we have a few years to go yet.
The index demonstrates that, until recent times, the mansions along the canal lost all their accumulated value in each downturn (and sometimes more).
With little option to “add value” – owners rode the full volatility of the cycle based on locational values alone.
Keep this in mind when investing with knowledge of the cycle.
It’s one reason I always advise my clients to have land they can subdivide in their portfolio - (ideally with a rentable house on top).
The value of subdividable sites is not based upon locational value alone.
The next few years are going to prove very lucrative for those that have the knowledge to make quality real estate investments.
And likely the smaller states (by population) will outpace Melbourne and Sydney in median price gains.
(For more information on that, check back on the information shared in this monthly edition.)
Editor Cycles, Trends, & Forecasts
[CC1]https://www.nytimes.com/2006/03/05/magazine/this-very-very-old-house.html (and quote below)