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The Long View on Real Estate

by Charlotte Hajer on October 17th, 02012

Sometimes a long view can yield a very different perspective than the short view.

Take housing prices, for example. For the past five years or so, the news media have often characterized the housing market as ‘volatile’ and ‘fragile’. The statistics certainly bear this out: from 02000 to 02008, the global housing boom propelled real estate prices to unprecedented heights – only to come crashing down dramatically as this latest economic bubble burst. It’s enough to suggest that real estate might not be the most reliable kind of investment.

But when you zoom out across the scale of time, this ragged spike on the graph of housing prices actually softens gradually, until it fades – among other similar spikes around it – into the continual ebb and flow of one long, wavy line that never strays far from its average.

This conclusion emerges from a (very) longitudinal study of housing prices by Piet Eichholtz of Maastricht University in the Netherlands. Eichholtz tracked nearly four centuries of housing prices on the Herengracht, a stately canal in the historic center of Amsterdam. While housing prices certainly plummet with the devastation of wars and soar in response to economic growth, Eichholtz’ graph shows that over the long term, average “real” housing prices – those adjusted for inflation – actually oscillate around an average that stays more or less constant across time.

These findings suggest, perhaps, that the price of real estate ultimately reflects its nature as a basic human necessity. Housing is, and will always be, valuable because it offers us shelter – not because it can make us money. In that sense, real estate prices may be better compared to the cost of produce and dairy products than to the value of the Dow Jones index.

The study has been discussed on a few blogs, and the original paper by Eichholtz can be found here.

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