Housing Market: Part 8 - A Very Long-Term Look At Housing Prices & Population
Looking at long-term real house prices and population growth trends in the UK, USA, and Amsterdam.
In my last post on the housing market, I wrote that:
“This post will, hopefully, conclude our discussion of the housing market.”
However, it seems like my research on this topic has struck a nerve. Some of your private responses to me included counterpoints like:
I should stick to valuing businesses because I clearly don’t understand real estate.
The US real estate bubble is isolated. It is not a global bubble, and conditions are entirely different to ‘08.
Population growth and limited supply ensure prices only go up in the long term.
If prices go down and you continue to hold, the ‘Bill-Gates-esque’ uber-rich will buy up all the land and prices will recover and surpass previous levels.
Out of these counterpoints, there are two main ideas I wanted to extract and explore:
What have house prices done across the world over the very long term?
What is the relationship between population growth and real house price growth?
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A Long-Run Look At Real House Prices Across The World
It is an invariably accepted belief that house prices always rise and always will as long as you have a long enough horizon. But is this true? Or, are we like the frog in a pot of boiling water? Are we falling victim to recent extrapolation bias?
I have plotted the three longest-running real house price indexes I could find for the USA, UK, and Amsterdam. I have also plotted the long-run median index level for each.
The United States Real House Price Index (1890-2021)
There are a few things that you’ll notice about real house prices in the US:
Before WW1 and WW2, prices were trending sideways. Then, from the onset of WW1, prices declined by ~30%.
After WW2, prices climbed rapidly again. Real prices rose ~55% between 1943 and 1948.
Prices went sideways for half a century from 1948 to 1998, with some boom and bust cycles at the onset of the 70s, 80s and 90s.
The 2008 housing bubble stands out like a sore thumb. I have covered that boom/bust in detail on this site and in my book. It is interesting to note that the prices declined until they almost reached the long-term median level.
Since mid-2012, prices have been inflating at a similar pace and magnitude as they did in the lead up to the ‘08 bubble. There has been a noticeable spike in 2020/21.
The United Kingdom Real House Price Index (1844-2021)
There are a few things you’ll notice about real house prices in the UK:
Similarly to the US, before WW1 and WW2, prices were trending sideways. Then, from the onset of WW1, prices declined by ~58%.
After WW2, prices climbed rapidly again. Real prices more than doubled (~105%) between 1943 and 1948.
Since then, real house prices have increased exponentially. Real prices doubled over the half-century from 1948 to 1998. And, in the 22 years since, they have more than doubled again - rising by 239%.
We can see similar boom/bust cycles as the US at the onset of the 70s, 80s and 90s.
However, in contrast to the US, the 2008 financial crisis did not have as pronounced an effect on real prices. But, like the US, real prices are now back above their 2007/8 highs.
Amsterdam Real House Price Index (1619-2021)
This data is the longest-term house price data I’ve been able to find. It has echoes of the Herengracht Index but is extended and updated.
There are a few things you’ll notice about real house prices in Amsterdam:
Prices rose dramatically in line with the Dutch Tulip bubble (1634-1637).
They rose even more dramatically during the Mississippi and South Sea Company manias in the 1720s.
In the 1790s, the French Revolutionary Wars (the French captured the Austrian Netherlands and the Dutch Republic) led to a dramatic real house price collapse. It took roughly 80 years for prices to recover to their previous level.
As with the US and UK, WW1 and WW2 saw prices decline. They continued to decline until 1986, with boom/bust cycles in the 60s and 80s.
Since then, prices have exploded. From 1986 to 2008, they were up more than 4.5x. And finally, from their 2013 lows, they have almost doubled (~81%).
If you bought housing there in 1619 and sold it in 1986, your real capital gain would have been essentially zero. Amsterdam was a fast-rising global power in the early 1600s. The Dutch Guilder became the global reserve currency in about 1640 and maintained that position until about 1720. You would have been through 370 years of economic booms and busts, losses and victories, and prosperity and productivity growth. But, for 370 years worth of holding, your real capital gain would have been zero. However, in the 35 years since, you would have realised a 559% real capital gain (!?).
Takeaways on Long-Term Real House Prices
These three datasets give us a cumulative 710 years worth of house price data to analyse. Drawing together similarities, we can see that:
Real house prices have followed a boom/bust cycle that follows the short and long-term credit cycles. Shorter-term declines have followed shorter-term booms. Longer-term declines have followed Longer-term booms.
Globally, something changed in the latter part of the 20th century (around 1990). Long-term norms for real prices have been thrown out the window. We have real house prices that are totally unlike anything in recorded history. I have previously covered in detail why I believe the Basel Accords, biased and flawed bank asset risk-weighting metrics, the proliferation of ever cheapening credit, and the switching of the pricing feedback mechanism from negative to positive have driven this.
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The Relationship Between Population Growth & Real House Prices
To analyse the relationship between population growth and real house prices, I sourced population data for the US, UK and Amsterdam. I divided the data up into 10-year buckets (some years don’t have population data) and looked at the growth in real house prices vs the increase in population over that time to test a correlation between them.
Correlations Between Real House Price Growth & Population Growth
See the spreadsheet and data here.
United States: r = -0.478, (p = 0.01)
United Kingdom: r = -0.060, (p = 0.73)
Amsterdam: r = -0.001, (p = 0.99)
I failed to demonstrate a correlation between population growth and real house price growth for the UK and Amsterdam.
I have evidence of a negative correlation between population growth and real house price growth in the US (!?).
These results fly entirely in the face of prevailing sentiment and suggest that there is, in fact, almost no relationship between population growth and real house price growth over the long term.
So, what are the answers to the questions I set out at the start:
What have house prices done across the world over the very long term?
The answer to this is that they have risen and fallen in line with the credit cycle and significant political upheaval but have essentially remained flat.
The explosive appreciation in real house prices over the last 25 years is entirely out of the ordinary.
What is the relationship between population growth and real house price growth?
We failed to show any positive correlation between population growth and real house price growth. Moreover, in the US, there is evidence that it is the opposite.
Data & Spreadsheets:
See the data and spreadsheet here.
Copy the data and spreadsheet here.
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