Long history of Dutch house reveals that bubbles always burst

AMSTERDAM - The house sugar merchant Cornelis Sasbout built in 1617 at number 150 on Amsterdam’s  Herengracht canal tells a cautionary tale about investing in property - prices fluctuate wildly, but are ultimately flat.

From boom to bust, the plot Sasbout bought for 4,600 guilders (2,100 euros) and which today might sell for several million euros on the prestigious canal, will in the long run always revert to some kind of price equilibrium.

This can be seen in a unique index dating back 350 years, drawn up by Piet Eichholtz, a real estate professor at Maastricht University using records of house prices on the canal. Even for people with no intention of buying property, it has been cited by Yale economist Robert Shiller for its reflection of the inexorable logic that bubbles always burst.

Just now for Eichholtz, the arrow is pointing down. He says home-owners worldwide may need to brace for double-digit losses in once-booming markets, and even more in places with low birth rates like eastern Europe as well as Japan and South Korea.

“I’m really concerned about housing markets where the demographics look bad,” he said. “Then prices can really fall a long way.”

His Herengracht index came to prominence in 2005 when Shiller, whose book “Irrational Exuberance” forecast the 1990s stock market bubble would burst, picked up on it as an ill omen for the U.S. house market.

Shiller and fellow economist Karl Case did the pioneering research in the 1980s that produced the S&P/Case-Shiller index of the U.S. housing market which has shown big recent falls.

Eichholtz says what makes his index stand out from house price histories in other cities is what he calls “constant quality” - the Herengracht has always been prime real estate. The index corrects for rising consumer prices but not wages.

Sasbout’s canalside plot doubled in value over the next 50 years in one of the world’s first housing bubbles, as immigrants flocked to the booming hub of the richest trading empire during the Dutch “Golden Age”.

Demand was fierce on the Herengracht - which means “gentleman’s canal” - the grandest of four waterways lined with elegant mansions on an arc around Amsterdam’s bustling harbour.

But repeated wars with England and France - keen to end Dutch dominance of the seas and trade in spices, sugar, silk and tobacco - set house prices gyrating over the next century. French occupation in 1795 brought a major slump.

Number 150 Herengracht changed hands many times: Abraham Mylius bought the house for 5,100 guilders in 1755. The price tag was the same over a century later when shopkeeper Johan Hendrik Louis Dreckmeijer bought the property.

“There are long periods where prices go up and prices go down. Over the centuries there is no uptrend or downtrend,”  said Eichholtz. “The index teaches that the house market is volatile and in real terms doesn’t go up or down structurally.”

Eichholtz says home-owners have short memories when it comes to big price falls: “When there is volatility every so often people are very myopic and tend to forget,” he said.

“A price fall of 30 to 40 percent is rather common and cannot be ruled out for the United States and Britain.”

House-price booms have turned to bust across the globe in recent months, with markets stalling from the United States to Spain, Britain to Ireland and even China.