Earlier versions of this piece on Forbes.com here and here got over 50,000 views combined. I guess I'm not the only one fascinated by this mysterious, natural economic phenomenon — real estate bubbles.

Amsterdam had three large real estate bubbles from 1582 to 1810. The real estate market was entirely different 200-400 years ago but those Amsterdam bubbles shared at least two similarities with modern real estate bubbles.

Changes in the amount of mortgage money chasing homes, however, was not one of the similarities because mortgages were uncommon in Amsterdam back then. Credit booms are not necessary for real estate booms but an increase in the amount of money chasing homes is.

A new working paper, “The First Housing Bubble? House Prices and Turnover in Amsterdam, 1582-1810” by PhD candidate Matthijs Korevaar of Maastricht University, looks at 164,000 registered house sales in Amsterdam from 1563 until 1811 (when Napoleon annexed Holland and the land title system changed.) The word “turnover” in the study means “sales.”

200 Years Of Amsterdam Housing Bubbles

Source: Working Paper, “The First Housing Bubble? House Prices And Turnover in Amsterdam, 1582-1810,” Matthijs Korevaar, 2018.

The author used house sale registration records that still exist of Amsterdam homes sold hundreds of years ago to construct a home price index along the lines of today’s Case-Shiller Home Price Index. The quality of the price index is best after 1625.

From 1604 to 1810, Amsterdam had three real estate bubbles. House prices doubled or tripled and then fell back to their initial values. Each bubble lasted decades.



the 1713-1750 cycle has at least some elements that make it a contender for the title of ‘earliest documented housing bubble’. Matthijs Korevaar





His research looked at several possible explanations for these Amsterdam bubbles, including economic fundamentals like changes in wages, rents and population, but found the top factors were:

An initial shift toward investing in real estate (caused by outside forces), which increased house prices, and more importantly here;

The higher prices triggered additional purchases justified by those past house price increases, which in turn caused additional price increases and additional purchases, and so on until house prices were completely out of whack.

Money Chasing Houses

The Great Real Estate Bubble in the United States is often attributed to crazy mortgage lenders. The craziness was exemplified at the peak when some lenders fought to sell more “Liars Loans” to borrowers who didn’t even have to prove they had the income to pay back the loans.

In Amsterdam in the 1600s and 1700s, mortgages were uncommon but Amsterdam saw three large real estate bubbles. How did house prices boom in pre-modern Amsterdam without having a crazy mortgage industry pumping out more and more money to chase homes?

Photo by Kata Pal

The author’s theory relates to the three main types of investments Dutch investors had at that time — stocks, government bonds, and real estate — and changes that caused new investments to shift away from government bonds and toward real estate.

The Dutch government had a series of faraway wars in the 1600s and into the 1700s. The government paid for the decades of wars, in part, by selling bonds to Dutch investors. When Dutch investors in Dutch government “war” bonds received their interest payments, they would often use the money to simply buy more government bonds. The government bonds were apparently the “safe asset” of the day.

After several decades of increasing borrowing, however, the Dutch government debt had become so large (roughly 200% of GDP by the early 1700s) that the government was struggling to pay all that interest to all those investors. The Dutch government had to cut back on issuing new government bonds.

When the government stopped issuing new government bonds, many Dutch investors shifted to investing the interest they earned on their old government bonds into real estate since there weren’t any new government bonds to invest in anymore.

Such “new” money chasing homes was a big part of the Dutch real estate bubbles, especially the 1715-1740 real estate bubble. (That bubble peaked when Dutch investors shifted away from investing in real estate toward investing in foreign (British and French) government bonds, the financial globalization of the day.)

House Prices Don’t Care Where The Money Comes From

The takeaway from this part of the story is that it doesn’t matter where the increase in the money chasing homes comes from. Whether the increase is caused by 18th-century Dutch investors shifting money into real estate, or crazy 21st-century American mortgage companies lending to anyone with a pulse, or modern Chinese investors looking for safe foreign investments outside the reach of their own government; it doesn’t matter so much why there’s more money chasing houses, it only matters that there’s more money chasing homes.

This all comes back to the fact that the supply of houses increases extremely slowly. Extremely inelastic (and immobile) supply make house prices behave differently than other products.

If the price of wheat increases 10%, you’re likely to see a significant increase in the supply of wheat within a year or two. Houses aren’t like that. The supply of houses in the U.S., for example, is so inelastic it increases more slowly than the supply of gold globally, and unlike gold, houses can’t be shipped around the world to wherever demand is greatest.

Given the extreme natural inelasticity of the supply of houses, you could say house price booms and busts are natural economic occurrences. Real estate bubbles are nothing new.

Similarity #2 – Price Momentum

Which brings us to the next major similarity between modern real estate bubbles and the bubbles in Amsterdam 200-400 years ago — speculation and upward price momentum.

The study found significant price momentum effects, that is, that higher prices — in and of themselves — can cause additional higher prices.

200 Years Of Amsterdam Housing Bubbles

Source: Working Paper, “The First Housing Bubble? House Prices And Turnover in Amsterdam, 1582-1810,” Matthijs Korevaar, 2018.

Breaking The First Law Of Economics

When the price of something increases, economics says people will buy less of it, but that’s not true in bubbles.

When house prices increase it’s not uncommon for some potential house buyers to become more — not less — motivated to buy. They look at those past price increases and expect them to continue to increase.

Some will want to buy as soon as possible so they can make money when house prices continue to increase as they expect. (In addition, I bet there’s a FOMO factor going on here too, fear of being left behind as others make money, the herd instinct. And still others will want to buy as soon as possible before they get priced out of the market forever when house prices continue to increase as they expect (fear of loss)).

If house prices haven’t increased much in many years, the new price increases open up a whole new reason to buy houses — short-term price appreciation — in addition to long-term rental income.

The larger and longer the price increases, the more potential buyers are confident prices will continue to increase rapidly if they buy. More and more buyers focus on the potential profits from price appreciation when they sell rather than the ongoing rental income when they own.

When enough of these new investors buy enough houses, those additional sales will cause house prices to (eventually) increase, which will again motivate investors, new and old, to buy more houses, which will cause prices to increase even more and so on in a self-reinforcing upward price spiral.

Sensitive To Emotions

And it doesn’t take a large increase in the number of investors speculating on continued house price increases to move housing markets.

In historic Amsterdam, only around 2% to 3% of houses sold each year. That means a small increase in the percentage of investors who have optimistic price expectations can have a big impact on the value of all houses.

Speculation in Amsterdam 1714-1750 Housing Bubble

Source: Working Paper, “The First Housing Bubble? House Prices And Turnover in Amsterdam, 1582-1810,” Matthijs Korevaar, 2018.

2-Year Price Lag

The Amsterdam study found that house price increases were explained, in part, by house price increases the previous year. Surprisingly, the study found house price increases were explained even more by house price increases TWO years earlier!

It seems when house prices have increased for the previous two years, some potential house buyers feel confident the upward price trend will continue and it’s safe to pull the trigger and buy investment houses… no matter how high prices are at the time. They’re keying on the past increase in prices, not current prices levels or the economic fundamentals.

The More Things Change…

Here’s the fascinating part: Studies of modern real estate bubbles found similar results — price gains the last two or three years help determine the price gains this year.

Despite all the differences between the real estate markets in Amsterdam 200-300 years ago and in the United States 20 years ago, studies of both have found a big determinant of price increases was the price increases the previous two or three years.

I wonder if this is a basic human trait — it takes a year or two or three for people to believe past house price increases (or decreases) are real. Their view of the future is just a reflection of the recent past.

Bubble Economics

One definition of a bubble says when higher prices make people want to buy more, not less, of something, it’s a bubble.

Bubbles break the fundamental rule of economics that says people will buy less of anything when its price increases. Apparently, demand isn’t just based on current prices but also on what people expect future prices to be.

In a market like houses where supply is incredibly inelastic, and only a small percentage of houses are bought and sold in a year, a very small increase in the percentage of people who are convinced house prices will increase a lot in the future can, in and of itself, drive up all house prices, whether in Amsterdam 300 years ago or in California 20 years ago.

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