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Myth: The value of real estate property only goes up

Myth: The value of real estate property only goes up

Photographer:Fotograaf: Joey Roberts/ Simone Golob

Myth busters

“I could give you a whole list of completely nonsensical views,” says Piet Eichholtz, professor of Real Estate and Finance. About pension funds, who think that they will earn more by hiring professional investors, about sustainable building solving nothing and only costing money, according to investors. Anyway, if he has to choose one, then he will choose the widespread myth that the value of real estate property only goes up. So investing in offices or shops is therefore good. Just like buying your own house.

“If you look on the surface, you will indeed see that the value of houses and offices increases,” Eichholtz explains. But anyone who buys a house will not automatically be richer in due course. He retrieves ‘Vier Eeuwen Herengracht’ (Four Centuries of Herengracht) from his bookcase – a monumental book with gable drawings of all the houses on this Amsterdam canal and a description of every building, with their owners and inhabitants between 1628 and 1972 – and opens it at a random page. “Herengracht 92. Someone bought this at an auction in 1646 for 28,800 guilders. Those houses were extremely expensive even in the seventeenth century. In 1962, this house was sold for 130,000 guilders.” Almost a fivefold increase, not bad, right? “If you take all those seven hundred houses on the Herengracht and you apply some econometrics, you will get an index. What do you see? Indeed, an upward line. Prices rise in the second half of the nineteenth century and they do the same in the second half of the twentieth century. So, is the above-mentioned statement correct? No, because those amounts have not been corrected for inflation. The guilder dropped in value – just like the euro does now. If you were to apply inflation correction and then look at the diagram, you will see that the prices of houses on the Herengracht have hardly risen in four centuries. The apparent increase in value is offset by inflation.”

Eichholtz takes another example: the commercial property market – offices and shops – in London between 1955 and 2009. He points to a diagram which starts low in 1955 and - with the occasional dip - rises to great heights. “Again, inflation has not been taken into account. When you correct for this, you see the following.” He presses his finger on a key, waits a while, and clicks the next screen with a sense of drama: it shows a descending line since 1955. How do owners keep their heads above water when the value of their property drops? “By asking exorbitant rents.” He continues by saying that the same trends also apply to “New York City, Maastricht, Belgium, everywhere. Actually, Amsterdam is an exception, prices have remained fairly stable throughout the centuries.”

“The whole idea that you earn money with real estate is an financial illusion. The amount does increase, but in terms of spending power you don’t get any better. Some time ago, I gave a lecture for NVM, the Dutch association for real estate agents. They were shocked when I showed them this. They also believe in the myth that the value of property can only go up.”

But surely there are people who have earned lots of money recently by selling their houses? Correct, says Eichholtz. His own parents are such an example, they bought a “semi-detached” in Bloemendaal for 25 thousand guilders in 1962. More than 25 years later it was sold for almost tenfold the amount. A great profit, and it wasn’t just his parents who benefited from the housing market, many people seized the opportunity at the end of the twentieth and the beginning of the twenty-first century. But still, this is a short-term effect and you can be lucky or luck can be against you. “You have to look at the long term to get a more realistic picture.”

This is a series in which academics shoot down popular myths 

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