During a recent visit to Amsterdam, I was impressed by a row of imposing houses lining the banks of a grand canal. It turned out that I was looking at the illustrious Herengracht Canal:

Herengracht Canal, Amsterdam (1671-1672)

According to Wikipedia, Herengracht is the first of the three main residential canals envisaged in the original Amsterdam city plan conceived in the early 17th century:

Herengracht (Patricians’ Canal or Lord’s Canal) is the first of the three major canals in the city centre of Amsterdam. The canal is named after the heren regeerders who governed the city in the 16th and 17th century. The most fashionable part is called the Golden Bend, with many double wide mansions, inner gardens and coach houses on Keizersgracht.

So, what can bankers, speculators and real estate tycoons learn from a 350-year old prime residential canal-side neighbourhood in the heart of the financial and trading capital of a centuries-old economic powerhouse nation?

It turns out that they can learn a great deal.

From a 1997 research paper by Piet Eichholtz, of the Institute of Financial Economics of the University of Maastricht, we first take note of this extraordinary 350-year long price data series of real property prices for Herengracht Canal:

Figure 1: Herengracht Canal Prime Property Real Price Index, 1628 - 1973: Past Performance Is Not A Guarantee Of Future Returns

And from a 2006 blog entry by economics blogger Mark Thoma, reporting on the work of US professor Robert J. Shiller, we see this valuable 350-year long data set displayed side by side with more recent data from the USA and Norway, informing Shiller’s prescient (and at the time, highly contrarian) prediction that U.S. property price growth was unsustainable and that mean reversion on time scales of decades should be expected:

Figure 2: Real Property Price Long Term Comparisons - Amsterdam, USA, Norway

Here is what Robert Shiller had to say back in 2006, when he argued his case for the need to go far beyond the 20-year studies of home price appreciation by presenting the chart comparing 350 years worth of Amsterdam prices to the bubbling US property market:

Indeed, all these studies confined themselves to no more than a few decades’ recent data. Such data simply cannot provide useful insights to homeowners planning to occupy homes for thirty or forty years, and wondering whether a general uptrend in home prices will inevitably carry them over any possible price declines.To answer the important questions, we first need to find out if there have been other booms similar to this one, and what happened after such booms ended. Until now long-term price indexes have not been generally available to allow us to do this. I have constructed one… The news is not good for homeowners. According to our data, homeowners face substantial risk of much lower prices that could stay low for a long time after.

And so, the conclusions for real estate tycoons who are exposed to property in bubbles that have yet to substantially burst, such as Canada, China, Australia, Cyprus and the United Kingdom, are stark:

(1) If you have had a great lifetime run with real estate – meaning, if you were born at any time near the bottoms of these decades-long cycles – and if you have earned a fortune primarily on the back of real estate capital gains, then count yourself very lucky, and consider taking much of your hard-earned profits off the table

(2) If, after a lifetime of mostly only profits, real estate (real) prices have eventually become very high relative to historical averages, be nervous and conservative: don’t bet anything you can’t afford to lose on a conviction that “prime property always goes up in value” because Herengracht Canal proves that what goes only up for a few decades, can also go only down for a few more decades.

In a second part of this post, coming soon, I will analyze the financial history of Holland and Amsterdam with particular reference to Reinhart and Rogoff’s recent work on 800 years of financial crises, and attempt to link specific credit growth and credit crunch events to the observed history of real prices at Herengracht Canal.