South Church Zuiderkerk and old Houses over canal with boats with tulips, Amsterdam, Netherlands
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Amsterdam had three large real estate bubbles from 1582 to 1810. The real estate market was entirely different 200-400 years ago but those Amsterdam bubbles shared at least two similarities with modern real estate bubbles.
Changes in the amount of mortgage money chasing homes, however, was not one of the similarities because mortgages were uncommon in Amsterdam back then. Credit booms are not necessary for real estate booms but an increase in the amount of money chasing homes is.
A new working paper, “The First Housing Bubble? House Prices and Turnover in Amsterdam, 1582-1810” by PhD candidate Matthijs Korevaar of Maastricht University, looks at 164,000 registered house sales in Amsterdam from 1563 until 1811 (when Napoleon annexed Holland and the land title system changed.) The word “turnover” in the study means “sales.”
200 Years Of Amsterdam Housing Bubbles
200 Years of Amsterdam Housing Bubbles
Source: Working Paper, “The First Housing Bubble? House Prices and Turnover in Amsterdam, 1582-1810,” Matthijs Korevaar, 2018.
The author used house sale registration records that still exist of Amsterdam homes sold hundreds of years ago to construct a home price index along the lines of today’s Case-Shiller Home Price Index. The quality of the price index is best after 1625.
the 1713-1750 cycle has at least some elements that make it a contender for the title of ‘earliest documented housing bubble’.
Money Chasing Homes
The Great Real Estate Bubble in the United States is often attributed to crazy mortgage lenders. The craziness was exemplified at the peak when some lenders fought to sell more “Liars Loans” to borrowers who didn’t even have to prove they had the income to pay back the loans.
In Amsterdam in the 1600s and 1700s, mortgages were uncommon but Amsterdam saw three large real estate bubbles. How did house prices boom in pre-modern Amsterdam without having a crazy mortgage industry pumping out more and more money to chase homes?
The author’s theory relates to the three main types of investments Dutch investors had at that time — stocks, government bonds, and real estate.
The Dutch government had a series of faraway wars in the 1600s and into the 1700s. The government paid for the decades of wars, in part, by selling bonds to Dutch investors. When Dutch investors in Dutch government bonds received their interest payments, they would often use the money to simply buy more government bonds. The government bonds were apparently the “safe asset” of the day.
After several decades of increasing borrowing, however, the Dutch government debt had become so large (roughly 200% of GDP by the early 1700s) that the government was struggling to pay all that interest to all those investors. The Dutch government had to cut back on issuing new government bonds.
When the government stopped issuing new government bonds, many Dutch investors shifted to investing the interest they earned on their government bonds into real estate since there weren’t any new government bonds to invest in, anymore.
Such “new” money chasing homes was a big part of the Dutch real estate bubbles, especially the 1715-1740 real estate bubble. (That bubble peaked when Dutch investors shifted again from investing in real estate toward investing in foreign (British and French) government bonds, the financial globalization of the day.)
House Prices Don’t Care Where The Money Comes From
The takeaway from this part of the story is that it doesn’t matter where the increase in the money chasing homes comes from. Whether the increase is caused by 18th-century Dutch investors shifting money into real estate, or crazy 21st-century American mortgage companies lending to anyone with a pulse, or modern Chinese investors looking for safe foreign investments outside the reach of their government; it doesn’t matter so much why there’s more money chasing houses, it only matters that more money is chasing homes.
This all comes back to the fact that the supply of houses increases extremely slowly. Extremely inelastic (and immobile) supply make house prices behave differently than other products.
If the price of wheat increases 10%, you’re likely to see a significant increase in the supply of wheat within a year or two. Houses aren’t like that. The supply of houses in the U.S., for example, is so inelastic it increases more slowly than the supply of gold globally, and unlike gold, houses can’t be shipped around the world to wherever demand is greatest.
Given the natural inelasticity of the supply of houses, you could say real estate booms and busts are natural. Real estate bubbles are nothing new.
Similarity #2
Which brings us to the next major similarity between modern real estate bubbles and the bubbles in Amsterdam 200-400 years ago — speculation and upward price momentum.
The study found significant price momentum effects, that is, that higher prices, in and of themselves, can cause additional higher prices.
I’ll cover what the study found about house price momentum in a future post.
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