Long Term Investment?

3 minute read

Dave from the REA Group here.

My thanks to Peter for the invitation to post on his blog. I’ve been an avid follower of it and am happy to support his efforts to make business2 even better. I’ll do my best to contribute something positive.

I didn’t want my first post to be about me or the REA Group. Instead, I thought I would post on the most fascinating article I’ve read about real estate in the last several years.

When most real estate investors talk about buying for the long term, they mean 5, 10 or 25 years. Only the Catholic Church and the the Windsors’ seem to hold property for several centuries at a whack.

Are those property holdings the key to these institutions’ wealth? Apparently not, according to a study by a Dutch economist.

He looked at the price history of a single street in Amsterdam and concluded that over the long term (4 centuries) property sort of sucks as an investment. (Not that you’ll be alive to complain about it.)

Real property values in the study went up a mere 0.2 percent per year since 1625, worse than the stingiest bank savings account. (Yet, they tripled in the last couple of decades.) Over time, home prices rise and fall, rise and fall. And when they fall, they fall pretty much back to where they started 50, 100 or 400 years earlier. This is true at least in neighbourhoods with the same “quality index”–that is, areas that are always the nice part of town, or always the bad one.

Of course, rocketing prices aren’t everything. There is also “value” in the tax deductions that can come with property and in having a place to live. (Not to mention the first time buyers’ bonus.)

Prince Charles excepted, not many homebuyers today give a damn that their property might not have appreciated by 2207. What we care about is 2010 or 2020. It’s 2 or 5 or 10 years down the road that matters.

Still, it’s fascinating once and a while to step back and look at the long term. Really bad stuff does happen, and when it does, there is often a collapse in real estate.

We may never see another major collapse in Australian home prices in our careers or lifetimes. Or we might.

In either case, what’s really amazing is that real estate agents will find a way to keep the market functioning, to help people keep buying and selling their homes, and at the same time to make a living for themselves.

That’s an achievement for the history books.

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  • Glenn
    Posted November 24, 2007 at 2:23 am 0Likes

    The 0.2% per annum was after adjusting for inflation and the study was for one street (actually a canal) in just one city. Thats like using the extreme growth of property values on Hedges avenue over the past 40 years on the Gold Coast to compare property values throughout Queensland.

    Pick any message good or bad that you want to say about property investment and you will find an example somewhere that supports it because of the differing fundamentals involved.

    Amsterdam for instance spent much of that 400 years in war. For 80 years with the Spainish Hapburgs, then the Anglo Dutch War with England and the there was France with the Napoleonic War in the 18/19th Century… It was nice of them to stay neutral during WW1 but after fighting the Hapsburg family for 80 years I am sure they did not want to take them on again so soon (ie. Hapsburg’s Austro-Hungarian Empire that started then lost WW1) …. and that leads to WW2 and Nazi occupation of Amsterdam and that whole world war 2 fiasco. Over 100,000 of the population were killed during WW2, which might dent the property market a touch considering the current population is only a little over 700,000.

    I certainly expect my property values might take a tumble if we get taken over by China or Indonesia..

    The article makes an interesting read, on both sides of the argument.

  • Dave Platter
    Posted November 26, 2007 at 10:13 am 0Likes

    Glenn, great comments.

    You’re right, Amsterdam hasn’t exactly been Nirvana for the past 400 years. But I challenge anyone to find a country that hasn’t suffered through too many wars, economic crises or major other problems in that time period.

    Someone famous once said, Only the dead are done with war (or something like that).

    In the Australia and the US, an attempt at this sort of analysis would be meaningless, given the youth of our countries. Even so, we’ve both had our fair share of wars and other crises to participate in.

    I’m certainly not selling up my unit because the 400-year outlook for it is bad. What I’m counting on is the 10-year outlook.

    You mention the Chinese. Let’s hope they don’t annex their favorite resources provider before 2017. 🙂

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