Property Value over Time | Location Value


In the Location value section, we had a good discussion on how a city could evolve along with an economic model to rationalize the process. Our models and discussions assumed that growth was constant. Oversimplified? Yes, but we needed to get ourselves introduced to some basic theory. Now with a basic understanding of urban economics, we will explore the value of housing over time.

Just after construction, structure value makes up the bulk of the property value. Over time, the building will age and loose value - it will depreciate. As time goes on, the building will require continued maintenance to keep its structure value from falling significantly. Location value may steadily increase, but the depreciation of the building can cause the overall property value to decline. Typically, only when significant renovation and improvements are made to the structure is there a jump in total property value. So the value of a property does not increase steadily in a constant linear fashion, it increases in jumps after additional capital has been spent on improvements. It could be argued that the jump in property value is merely the cost of the improvements - if not a little less. At a future point in time, the structure may be considered economically obsolete and will be demolished. Perhaps a better and higher use for the property was found, or the structure had become functionally obsolete. We find that the property value is ultimately limited by the location value. This finding is backed up in the landmark research done by Eichholtz and Geltner in their paper "Four Centuries of Location Value: Implications for Real Estate Capital Gain in Central Places" or "Four centuries of location value".

I know - many folks do not like reading history. Just remember, those who know little about history are doomed to repeat it (or something like that). Look, if you focus on how big events can affect property values you'll get a lot from this. Notice how similar types of events have similar consequences.

Herengracht Location Value Index

Eichholtz and Geltner's paper focused on the Herengracht region just outside the city center in historic Amsterdam. The region made a great location study because initially it was just outside the medieval boundaries of the city. As time passed, the area was eventually incorporated into the downtown commercial district. How much time did they have data for? Try 347 years worth of data. From 1628 through 1974 they were able to develop an index know as the Herengracht Location Value Index from over 3,851 repeat sale transaction pairs (See Figure A).

Figure A, Herengracht Location Value Index (1628-1974), Source "Four Centuries of Location Value: Implications for Real Estate Capital Gain in Central Places" by Eichholtz and Geltner
The Herengracht Location Value Index from 1628 through 1974.

Transaction pairs are the price at which the same house sells over time. Herengracht is also unique in that the address has always been desirable. Incredibly, the buildings remain fairly well intact with modifications to the existing structures being done to keep them from being obsolete. There is virtually no structural depreciation. Therefore, what they were left with was a location value index with the span of three and a half centuries. Another wonderful thing our researchers did was to convert all of the values into an index that could be compared across time to see how location value behaves - we can see the basic property values over time. The index was divided into nine periods that best explained index levels, and specific periods of history for the Netherlands that have a specific impact on Amsterdam.

Before we delve into our historic timeline, we need to set the stage with a bit of history to understand how our first period came about. At the beginning of the 16th century, Amsterdam was a small port town that was part of seventeen loosely united feudal provinces known as the Habsburg Netherlands. They were ruled over by Emperor Charles V of Spain. Charles had a fondness for the region since he had been raised there. In 1548, Charles granted the seventeen provinces limited autonomy and made it a separate territory from either Spain or France. Eight years later, Charles abdicated the thrown to his son Philip. Being raised in Spain, Philip did not have the same affinity for the region as his father. Under his father, the region had a bit of autonomy, but Philip wanted direct control over everything. Additionally, his hatred of the Protestant movement caused him to start what was a mini-Inquisition in the region. It was a capital punishment not to be Catholic, and many citizens were killed. All hell broke loose. At first the rebellion was Protestant's defending their rights (and lives), but as the revolt dragged on, Spain was having trouble financing the campaign and occupation - this and other conflicts were draining the treasury. Therefore, they decided to place additional taxes on the local citizens to pay for the conflict. At this point, the Catholic inhabitants, who were oblivious to their fellow Protestant's plight, had enough. The whole region revolted to begin the 80 Years War around 1568.

Through several years of turmoil and atrocities, the territory was divided. Most of the region had been recaptured in the east and south. The new "borders" roughly resemble the modern day borders of the Netherlands on the northwest, with the occupied regions to the south and west being Belgium and Luxemburg. Protestants the occupied Spanish regions were given two years to leave the Habsburg lands or convert. Most chose to leave. Many of those being exiled were highly skilled craftsman and rich merchants from large port cities. They headed north to the self-proclaimed Republic of the Seven United Netherlands - better known as the Dutch Republic. These wealthy and skilled immigrants would have a profound effect on the Dutch Republic, and Amsterdam in particular.

Early 1600, it is the beginning of the Golden Age. In 1609, the Twelve Year's Truce is signed between Spain and the Dutch Republic. The Dutch Republic is officially recognized as a sovereign nation by European countries, and they begin to build a network of consulates. Amsterdam is now becoming one of the most important ports in the world. Windmills have been developed, along with the ability to use peat for fuel. Sawmills are developed which allowed the construction of vast fleets. The Dutch East India Company was formed, and financed through the selling of shares at one of the world's first stock exchanges located in Amsterdam. Merchant banking develops in the region, and insurance was developed. The Dutch economy has become truly modern. In this early period, the country was undergoing industrialization. Worker productivity became the highest in the world. Only 40% of the workforce was needed for agriculture, which not only provided sufficient food for the population, but enough food was produced to be available for export at a profit. As profits from the many industries and trading accumulated, there was demand for investing in other opportunities, and again, the Amsterdam stock market would be the place to match the demand and supply of investment funds. In 1620, the Dutch West India Company was formed with a trade monopoly in the Caribbean. With all this economic activity, many other citizens from Germany and the nearby countryside began to migrate to Amsterdam. Immigrants felt that there would always be work in Amsterdam. The city's population grew rapidly.

Image 1, Cornelis Anthonisz's Bird's Eye view of Amsterda, 1544. Woodcut. Rijksmuseum
A map view of Amsterdam in 1544.

The canal system in Amsterdam began construction around 1613. Four canals were to be built around the city's land perimeter - Amsterdam is a port on the coast. The final la wet of the cannels would form semi-circles around the city that start at the bay on the north and end at the bay on the south side of the city. The inner three canals were to be installed for residential development - the Herengracht, the Keizersgracht, and the Prisengracht. An outer canal was to be installed for drainage and defense. The canals were built in two phases. The first phase was the north half of the canals which was completed around 1624. The second phase of construction did not begin until 1664. The canal construction would not be complete until sometime in the late 1600's to early 1700's.

First Period (1628-1688)

The Herengracht index is set at 1.0 starting in 1628. The Herengracht region has just been completed four years earlier, and it is located just outside the medieval city boundaries on the north side. The Twelve Year Truce has ended and hostilities between Spain and the Dutch Republic are resuming. During the truce, the Dutch Republic has trained an army that is able to thwart any Spanish invasion plans, and their naval fleet is world class in size and technology. Under the new King of Spain, Philip III, Spain begins waging an economic war with limited military engagements. Further adding to Dutch misfortune, due to the success of their traders, other countries such as England and France enact protectionist measures such as tariffs to help their fellow citizens compete. Trading profits are stagnant, so investment capital moves from trading ventures to infrastructure projects, such as building the dike system to convert lakes into useable land. There is some growth in Amsterdam, but as the index shows property values in our region is flat and unchanged until 1638. Spain's economic stranglehold is effective along with the trade tariffs.

Figure B, Herengracht Index (1628-1688), Source "Four Centuries of Location Value: Implications for Real Estate Capital Gain in Central Places" by Eichholtz and Geltner
Herengracht Index values from 1628 through 1688.

Around 1625, England enters the war alongside the Dutch. The war has gone from an economic war to an all out shooting war, but with England entering the battle, the tide begins to turn against the Spanish. The Spanish end their blockades in 1629. Other regional wars end, which further open up trade routes that had been constricted. France enters an alliance with the Dutch Republic against Spain in 1635. Soon, Germany begins ordering food and weapons from Dutch suppliers for its military ambitions. Incomes soar, and residential real estate values double, the index rises over the next ten years from around 1.0 to 2.0 for location value. Finally, in 1648, there is peace between Spain and the Republic - France would continue fighting Spain for another ten years. For now the Dutch can get back to business, the Spanish embargo is over.

The industrious Republic is now humming. For the next twenty years, the country will experience prosperity. They will rise to be the world leader in trade with only one conflict, the First Anglo-Dutch War (1652-1654). With incomes and profits up again, we see that real estate values will also increase. The Herengracht index will climb from 2.0 in 1648 to 2.5 in 1668. During this growth period, there is one significant dip in values in 1662, which corresponds with an outbreak of bubonic plague.

Bubonic plague is spread by fleas that are found on rats and mice. Since Amsterdam received products from all over the globe, they are highly susceptible to the spread of epidemics. Rats and mice easily stow away on ships that provide a convenient way for viruses to hop from one continent to the next. This plague outbreak is believed to have originated from Algiers on the content of Africa. Because of the plague, ships were quarantined for thirty days before being allowed to unload their cargo. Nearly 10% of the population of Amsterdam died during this epidemic. Rich residents left the city for the countryside in search of safety. A local sentiment arose that the canals had something to do with the spread of the disease. Property values on the canals such as the Herengracht suffered. The plague seems to have diminished by 1665, and once again, Amsterdam got back to business.

Image 2, Map of Amsterdam in 1662 by Daniel Stalpaert. Photographed by Nicolaus Visscher. Source, Wikimedia
Map of Amsterdam in 1662.

1672 is known as the Disastrous Year. The Dutch would face two major challenges. First, war had been declared against the Republic by England, France, Münster, and Cologne. This war was started over the French Kings anger that the Dutch Republic did not assist him a few years earlier in invading the lower provinces currently known as the Spanish Netherlands. As always, these wars expanded to include many nations taking sides. In an interesting twist, Spain would join the Dutch. England and France invaded the Dutch Republic, but were repelled at a high cost. Friendly German principalities assisted the Dutch in holding off Münster and Cologne, however; territory was lost. Peace was brokered with England in 1674, but it would not be until 1679 when France (and by this time a whole host of other nations) would finalize a truce.

The war cut trade off with almost all of markets the Dutch traded, and the prices of many exports began to decline. Other regions with lower waged workers began to industrialize and provide the same products at lower costs, outsourcing. To counter, the manufacturers in Amsterdam switched to producing higher-end products, but without much avail. Incomes declined. Furthermore, many investments were not doing very well. The Dutch West India Company went bust in 1674 due to excessive debt and rivalry with the English - a second company would be started. The Dutch East India Company also had issues. Due to political issues they had to change from trading high profit goods to low profit bulk goods, such as tea and pepper. To make matters worse, they now had to compete with other companies - specifically the British East India Company. A price war ensued, and although the Dutch East India Company actually expanded, there was no growth in profits. It was a profitless growth.

The war and economic issues dealt a severe blow to the Dutch Republic - The Golden Age had ended. Back in the Herengracht region of Amsterdam, we see that property values plummeted. In 1671, the index was at 2.12. During the war, the index fell as low as 1.45 and settled at 1.51 as the war was beginning to wind down in 1678. Almost 38 years of property value gains had been lost. It would be fifty years until property values would reach levels equal to the 1660's. For the next seven years (1678-1685), there was growth in Amsterdam property values. The Herengracht Index hops around a bit with some volatility. We do not exit this period of study without more intrigue. These next events will set of a chain reaction that will affect our property values for the next fifty years.

Louis XIV of France had aims of expanding his empire. Following the end of the war, he set up the Chambers of Reunion to make sure France received all of the territories it was owed based on the various treaties from recent and not-so recent conflicts. The claims were based on archaic medieval laws, which as one would expect, favored his claims and land grabs. In fact, they even made some stuff up and took territories from countries who were too preoccupied with other conflicts to do anything about it. Things were getting a bit out of hand when in 1683 Spain was forced into war. They had found French forces were beginning to occupy some of their territories, such as the Spanish Netherlands. The war was short, but brutal and ended in 1684. To make matters worse, King Louis XIV in 1685 revoked the Edict of Nantes, which granted French Protestants basic rights as citizens since 1598 - now they would be treated as heretics. Protestant churches were ordered to be destroyed and Protestant schools closed. Hundreds of thousands of French Protestants would leave France over the next twenty years for England, the Dutch Republic, and other more tolerant regions. As one would expect, France was becoming very unpopular around Europe. Once again, a significant portion of the refuges would be highly skilled workers who probably helped provide for the rise in Herengracht property values due to population growth of Amsterdam.

Across the way, England was beginning to experience its own internal turmoil in regards to religion. In 1673 and 1678, Charles II had passed legislative Acts that required anyone holding a public office, such as serving in Parliament, or holding a government job had to be a member in the Anglican Church of England - the established church for the country. On his deathbed, Charles II converted to Catholicism and appointed his brother James II to the thrown - Charles had no legitimate children. James was a Catholic and his assumption of the throne was not popular. Things were going to get worse. James wanted to repeal the Acts that punished Catholics. When Parliament disagreed - he shut them down. He was a bit of an absolutist. He replaced various high offices with Catholic favorites, employed a standing army, and put Catholic officers in charge. Now the country tolerated him feeling his reign was an anomaly, and his daughters were Protestant - so, it would all eventually pass. Until, his wife bore a son in 1688. Now fears of a Catholic dynasty in England would push events forward.

How does this tie into the Dutch Republic? Well, it just so happens that a regional governor in Holland, William III was a prince by birth. He was also married to James II's daughter Mary. In addition, he was known in England and a Protestant. He had been caught up in the turmoil in England, and had ambitions of profiting from his marriage to Mary. When James's wife had produced a male heir, several noble men invited him come over and "save the Protestant religion". Agents were sent out to spread propaganda in favor of his taking the throne of England. He felt he required a large invasion force, so he asked his current compatriots, the Dutch Republic to assist.

At first, the Dutch were reluctant, knowing firsthand the enormous cost of war, and felt this was unnecessary. However, in 1687, King Louis XIV of France tried to intimidate the Dutch by imposing large trade tariffs and seizing all Dutch ships that were in French ports. This was to serve as a warning for the Dutch to stay clear of this matter. However, William and supporters were able to spin it as France's imminent desire to invade the Republic. Since they had just recently fought off both England and France, they were persuaded that by helping William they would not suffer another Anglo-French attack. This would be a pre-emptive operation for self-defense. Alliances were entered into with other nations, specifically with the motivation of joining against France. Even the Holy Roman Empire sided with William when he agreed not to persecute Catholics in England. A Grand Alliance is formed in Europe.

The Dutch Republic invades England in 1688, sparking off the "Glorious Revolution". With no major conflicts, William and his wife Mary were established as joint monarchs of England by 1689. James fled to his cousin and alley, Louis XIV of France.

We are at the end of the first period. Our index has finished at a value of 1.94, and with a local in charge of one of the world's current super powers, the local's must be feeling good about the future. If only life could be as simple to allow us to use the fairy tale ending: "and they lived happily ever after".

Second Period (1689-1789)

We begin the period with a location value in the Herengracht region of 1.89. The boundaries of the city of Amsterdam have grown to the south, but the location of the Herengracht region in relation to the city's center (proximity to its downtown / commercial areas) has remained relatively unchanged. Remarkably, this will be the case for the next 100 years.

Figure C, Herengracht Index (1689-1789), Source "Four Centuries of Location Value: Implications for Real Estate Capital Gain in Central Places" by Eichholtz and Geltner
Herengracht Index values from 1689 through 1789.

Williams' success in England began the Nine Years War where he commanded both the English and Dutch forces. The war started in Ireland and spread throughout Europe and the colonies. By 1697, the war ended with France being the ultimate victor in preserving many of the land grabs it had taken earlier. However, there was a new controversy brewing as territories were being shuffled about. The succession of the Spanish thrown was becoming an issue, as it could unite Spain and France into a superpower. All involved were attempting to keep a balance of power in the region.

The King of Spain, Charles II died in 1700 leaving his kingdom to his half-sisters grandson Philip, who also happened to be grandson to our friend King Louis XIV of France. Philip was announced as King over all the former Spanish territories, which violated treaties from the Nine Years War. During the war, those territories had been effectively lost. Louis wanted to cement his grandsons hold and the potential for French dominance. He had made several tactical moves, which strained relationships with England. The final straw was when France recognized James II son as the rightful monarch of England. The War of the Spanish Succession would begin in 1701, and last past William III's death until 1714. The Dutch were dragged into the war. Fighting would be all over Europe to include the lands of the Dutch Republic. At the end of the war, the Dutch amassed a huge debt. England would gain the most with new territories in the Americas; the Dutch would receive some forts in the Spanish Netherlands and the territory adjacent to it - Guelders.

With most of the country's attentions toward warfare, there was not much growth of any kind. From 1689 through the end of the wars in 1714, the property location values back in Herengracht remain relatively flat. There was a quick jump up after the Nine Years War ended, but those values would again plummet with the start of the War of the Spanish Succession. Wars had disrupted profitable trade and commerce, and had placed an enormous debt on the country.

During the remainder of the period, the Republic would undergo considerable economic changes - there would be a shift from industry to service sectors. After 1719, the Dutch maintained a policy of neutrality except when their treaties with the English required them to send troops to fight in Ireland in 1745. Besides that - they were neutral and under the protection of the British Admiralty. Dutch ships went from trading only local goods to shipping companies that shipped for merchants in other parts of the world. Due to high wages and taxation, most of the industrial and agricultural production also shifted more to higher-end products (again) to compete on quality as compared to quantity. Much of the industrial plants would end up in England, financed with Dutch investment looking to capitalize on lower wages. With exports, they now had to compete with other burgeoning trading posts such as Hamburg, Bremen, and London. One bright spot is that the Amsterdam, along with London, was the central markets in Europe. Over time, however, London would eventually take the lead.

The period after the war had very little growth in terms of population for Amsterdam. In fact, the researchers describe this period as stagnant. After the wars, property values do seem to rest at a new index level of above 2.0 - so location values were up over the earlier part of the period. Levels did not increase as much as the Golden Age when the country was developing, but did increase until the fatal year of 1780.

Third Period: End of the Republic (1790-1850)

1776 - The American colonies declare their independence and form the United States of America. Since the beginning of the American Revolution in 1775, merchants in Amsterdam had been providing the rebels with arms and munitions in exchange for tobacco and indigo. Around 1778, Spain and France entered the War of the American Revolution. England tried to pressure the Dutch Republic to side with them against France, but they refused - preferring to export supplies to France. Adding insult to injury, the Dutch ships were using their neutral status to send arms and supplies to England's enemies. Relations worsened to a boiling point, when in 1780, England declared war on the Dutch Republic to begin the Fourth Anglo-Dutch War.

Since 1719, the Dutch had relied on other countries - predominately England - to provide military protection and support. Therefore, the English were easily able to defeat their Dutch adversaries. By 1784, the Dutch surrendered. Blaming the current government, internal turmoil eventually led to revolt. By 1795, the Dutch Republic is overthrown, and the Batavian Republic is formed, with the backing of the French Republic. The new republic would only last a few years. Napoleon took over France around 1800, and proclaimed himself Emperor in 1804. English embargoes and Napoleons trade policies ground the Dutch trading economy to a halt. The population of Amsterdam declined. Eventually the entire country was annexed into Imperial France in 1810.

Looking at the index, we see a catastrophe in land value. As population and incomes fell, so did our index. At the beginning of the period in 1791, we were at a value of 2.7. Within the next 24-years, the index would drop to 0.75. In 1815, property values were technically lower than at any time in the history of Amsterdam. We would not see a real growth in property location values until 1851.

Figure D, Herengracht Index (1790-1850), Source "Four Centuries of Location Value: Implications for Real Estate Capital Gain in Central Places" by Eichholtz and Geltner
Herengracht Index values from 1790 through 1850.

Periods Four to Nine (1851-1974)

Not to say that the following periods are any less important, but the magnitude of events are spread out over the next five periods of the study. I hope that we can now appreciate how external events can have a profound effect on the location value. In this next section, we will wrap up the next 123 years in the index and highlight specific valuation impacts as put forth by Eichholtz and Geltner. It is time to put on our seatbelts…

1851-1880. Industrialization finally comes to the Netherlands. With new technologies come new jobs resulting in an increase in population in Amsterdam. During this period, transportation is still limited so the population increase results in increased density - not so much an expansion of the city border. Therefore, location values rise from 1.2 at the beginning of the period to 2.5 in 1880.

1880-1913, the population of Amsterdam nearly doubles, industrialization continues to increase productivity, and personal income continues to rise; however, our value index is flat across the period. We begin with an index value of 2.5 and end with an index value of 2.5. How could this be? When cities grow the property's location value is supposed to increase. Technically, the location value did increase. The cost of commuting changed thanks to a newly developed public transportation system, the horse tram that appeared around 1875. By 1900, the system was switching over to electric cars and the conversion was 90% complete by 1904. With mass transportation, it was easier for the population to move further out from the city center without a huge effect on the commuter time. As development moved to the peripheries of the city and expanded the boundaries outward, the Herengracht region began to be closer to the city center. However, the technological impact of the trams on commuting costs had the effect of keeping location values unchanged.

Figure E, Herengracht Index (1851-1974), Source "Four Centuries of Location Value: Implications for Real Estate Capital Gain in Central Places" by Eichholtz and Geltner
Herengracht Index values from 1851 through 1974.

1914-1930, the Netherlands had remained neutral during WWI, which helped them avoid large war debt, damage, and population loss. Their problems began to occur after the war. Germany was a main trading partner, and the chaos in the country following the war caused an economic crisis. Furthermore, world trade did not pick up. Since almost 30% of the economy was dependent on exports, and trading opportunities were limited - the economy suffered. The Netherlands would not see the roaring twenties as in the United States.

In Amsterdam, we find steady growth after the First World War, but the city size did not expand as much. The Herengracht region is now located at the edge of the city's center - downtown is also growing. Location values have jumped up to 4.0, even though the economy and incomes are down. Many of the residences are being converted from residential uses to commercial.

1931-1946: The Great Depression and WWII. The Netherlands fell into the Great Depression around 1931 with mass unemployment. As fears of war began to grow due to Nazi aggression, the Dutch began to rearm which was responsible for an artificial recovery in 1938. In the summer of 1940, Germany invaded and occupied the country until the end of the war - spring 1945. At the beginning of the period, the location value was 4.0, after the war the index fell to 2.0.

1946-1974: Recovery and growth. After the war, there were still many trials and tribulations, but overall it was a growth period for the city and the country. Amsterdam's population grew moderately, while incomes grew significantly. New transportation systems are developed and the automobile gains wide use. The city border expands dramatically - the Herengracht is now a predominately a downtown commercial district with index values at 6.9. Our 347-year odyssey is now at an end.

In summary of the 347-year history, our researchers reached the following conclusions. Over time, there is not much growth in the location value. The average growth rate over the entire timeline was only 0.56% per year. Most of the growth was attributed to the Golden Age in the 1600's and the period 1946-1974. The major increase in location value during the 1600's was due to the Herengracht region going from agricultural land to residential, whilst the major increase in 1946-1974 was the conversion of residential use to commercial use. The other important factor for property values is income growth, which was high during both periods cited.

Stepping a bit away from the researcher's findings, we can take a closer look at the index values. Since we probably will not have 347 years to invest, our concerns are with smaller periods. Even during the worst of times - during the French and Nazi Occupations, there was some price movement each year. Although the average growth rate was only 0.56% per year, the standard deviation (or volatility) of the index is 9.96% over the whole time range. In the 1946-1974 periods, the location value index had a volatility of around 14%; stocks have volatility around 15%. What does this mean? Although the location value itself may average out to a low growth rate over the long haul, we can see that there are periods where the index does move significantly. Furthermore, we can see that there are always periods where values are jumping around - property values are volatile. Therefore, to answer our original question, "do property values go up over time", we would have to conclude - maybe.