Is investing in real estate more profitable than investing in the S&P 500 over a long period? This long term chart shows that for much of the last century investing in the S&P 500 returned much greater returns than investing in real estate did. This chart only misses one thing in my opinion. This chart does not show possible rental income and the re-investment of this rental income in other houses. At the same time it also doesn’t show possible costs and taxes associated with homeownership and thus with investing in real estate. Nonetheless it is a nice chart to view.
Here is another chart showing US house prices from 1987 till April, 2019. This is the Case Shiller Index.
Here is the same Case Shiller index with year-over-year percentage change until April 2019. This chart is showing that the rise of house prices has declined the last few years. A cause for this has been the Federal Reserve which has raised rates from 2016 till 2019. This has caused mortgage rates to rise over that same period.
Here’s a chart of the average fixed rate on 15 year and 30 year US mortgages. It will be interesting to see whether the drop in rates will lead a pick up in house prices later this year. From the end of 2018 mortgage rates have been dropping lower as it has been anticipated that the Federal Reserve will lower rates (which they have done with 0.25% in July, 2019.
Here’s two different charts of the Herengracht Index. The Herengracht Index is a very long index showing the value of house prices along the Herengracht in Amsterdam. The Herengracht is a street in the center of Amsterdam alongside the Herengracht canal and has since the beginning of the 1600s always been a street on which people have been eager to live.
“The Herengracht has been dug in three phases, of which the first was in 1585, the second in 1612, and the third in 1660. By 1680, nearly all the lots on the canal had been developed. The properties built during the first development phase between 1585 and 1612 were relatively small and insignificant, but from the second construction phase in 1612, the Herengracht was meant to be the most fashionable and beautiful of all the canals in Amsterdam. It has been Amsterdam’s finest location until present times.
Nearly all the properties on the Herengracht practice of trades was prohibited, many also were for residential use, but, although the contained the office of the owner. In this century, the buildings along the canal have been increasingly put to use as offices, especially in the more expensive areas. The first building specifically constructed for office use dates from 1858, while the first time an existing building was transformed into an office was in 1808. Especially in the first half of the twentieth century were many properties transformed into offices. For all properties, ownership of the building and the land on which it stands go together.
The number of properties has gradually decreased over time. Originally, there were 614 lots, but already during the first development phase, lots were combined to allow for the construction of bigger buildings. This has continued until the present, and there are now some 487 properties.” Source: A Long Run House Price Index: The Herengracht Index, 1628-1973
This animation (gif) show the property value in euro per m2 of houses in Amsterdam from 2002 till 2018 based on the sale price. The color ranges in the legend are adjusted to the annual inflation rate in The Netherlands.
Housing prices in Amsterdam have doubled in most parts of the city. Notice how the prices in Amsterdam reached a low in 2013 after the financial crisis. I’ve posted before about how Dutch housing prices dropped a total of 20% from 2008 till 2013. It’s which was It’s easy to spot the boom bust and now boom home price in Amsterdam in this visualisation.
Dutch house prices have remained flat the last few months. The price index has been stuck near 85 since April of this year. According to CBS year over year home prices dropped 4% last month. Home prices are now 20.3% below the record of August 2008.
CBS: Prices of existing owner-occupied dwellings
CBS: Price index of existing owner-occupied dwellings
Corrected for inflation house prices haven’t moved either as Mathijs Bouman showed with another chart on Twitter. According to the chart below home prices corrected for inflation are at the same level as in October 1999. In a post I made about Dutch house prices in June of this year I also noted that the price, corrected for inflation, was the same as in October 1999. While we can speculate about what home prices will do next right now it looks like we have found a temporary bottom at the very least.
Bouman: Dutch house prices corrected for inflation
The Dallas Federal Reserve updated their International House Price Database with the number for the first quarter of 2013 last week. They are tracking house prices since 1975 so this provides for nice opportunity to see where we are standing on a long term basis.
In a in a recent post I mentioned that house prices in the Netherlands are now at 1999 levels adjusted for inflation (blogpost).
These new released numbers from the Dallas Fed show that the Dutch Real House Price Index (house prices adjusted for inflation) are approaching the levels of the last top in 1978. Although I never expect (and hope) that house prices will approach the same level as the bottom of 1985 but it wil be interesting to see if prices will go lower than the top in the 1970s. My argument for this is that Dutch society went in a few decades from having almost only single-income households to now the majority being two-income households. In 2009 the CBS reported that two-income households made up 57% of all households. Two-income households make more money than single-income households. Because of this the amount of money the average household can spend is a lot higher these days and thus they are able to afford a higher price for their house. Source: CBS (PDF)
Just for reference here is also the chart with the Dutch House Price Index from the Dallas Fed.
House prices in the Nethterlands have been declining since the end of 2008. The total decline has been 20.6% since the top according to CBS.
In nominal terms house prices are now at 2002 levels.
Thanks to @mathijsbouman I now have a chart that shows that the average price for a house adjusted for inflation in the Netherlands is now at a level last seen in october 1999. A little calculation that I made based on this chart comes out at a decline of 28% from the top.
Interesting about this is that a few years ago the tax on buying a home has been reduced from 6% to 2% so one could argue that prices of houses are even lower than 1999 levels.
The decline has wiped up all the gains that were made in the housing market by using special constructions to finance mortgages such as interest-only mortgages. A product that became popular after 2000 and which helped home prices to increase. Now only mortgages are available where people have to pay of the loan.
Thanks to the decline of house prices the percentage an average household has to spend every month for their house has dropped from 30% of net income to 20% of net income.
Before 1999 home prices rose mainly because many households went from buying a house on one income to buying a house on two incomes. People would buy houses based on 6-7 yearly income instead of 4. It will be interesting to see if that trend will change.
User snorkel over at huizenmarkt-zeepbel.nl edited an interesting graph about the Dutch housing market with the housing price decline of the past few years. The slide is coming from a presentation given at TU Delft.