This article was posted on Wednesday, Jul 01, 2020

Continued from Part 1…

The late 1500’s, following the Eighty Years War, and most of the 1600’s were Amsterdam’s apogee. It was then, no longer concerned with Spanish warships, that Dutch merchantmen sailed over most of the known world, alert for new sources of rare spices. They returned from Indonesia with pepper, cloves and nutmeg. Nutmeg was, at the time, the third most costly commodity in the world after gold and silver. A sack of nutmeg could make a man wealthy for life. Two sacks would make him suddenly desirable to eager young maidens. One assumes that the two-sack bundles, like Costco now offers with peanut butter, were in high demand. 

And every season, there were large ships, cargo holds fully packed, returning with this stuff.

It wasn’t only Indonesian spices. Contemporaneously, the Dutch East India Company acquired a monopoly on trade with Japan (gold, silver, copper, porcelain), and maintained it until Admiral Perry came knocking in 1854. Naturally, all this going and coming benefited the stay-at-home speculative Dutch traders who underwrote the trips and called triple-dibs on the returning cargos. In this way, Amsterdam became one of the richest cities in the world. 

Immigration – Great wealth attracted the hopeful. People immigrated to Amsterdam from throughout Europe. Those who became a burden on the citizenry were encouraged to continue their travels elsewhere. Those who had saleable skills were required to meet three conditions of acceptance: (a) to join guilds (demonstrating the immigrant was self-supporting), (b) to serve in the civil patrol (thus benefitting their new city in a meaningful way), and (c) to cooperate with their local municipal district in competition with the other districts during carnivals and parades. Immigrants from diverse backgrounds (Sephardic Jews from Portugal, French Huguenots, and German Lutherans) were thus forced to acculturate. Family and friends from back home learned of homeboy’s success and moved to Amsterdam themselves. The city eventually could not contain them all.

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Canals – To help resolve the congestion problem, the city regents assumed hegemony over contiguous fields. Amsterdam fronts a navigatable river, so it could not easily grow in that direction. But the other three sides were available for development. The city regent’s decision was to dig semi-circular canals arcing from the river south of the city, inland from the river but around the city (radii varies) and back to the river on the north. Four canals were eventually dug with the most prestigious being the first, the one closest to the walls of the Old City. This became the Herengracht Canal and was eventually lined on both sides with elegant homes.

The Fransz House – The house Pieter Fransz built for his family in 1625 was not the first, but neither was it the last of the grand homes built along both banks of the Herengracht. Fransz’s house was rectangular, with one of the long sides facing the street and had step-gables on the narrow ends. That house still stands, although it has been sold and re-sold through the centuries, with each sale (address, date, price, seller, buyer) recorded in the local land registry. It is not terribly surprising that the Dutch keep such records. Other countries maintain historical land records as well. Scotland, for example, has their Sasine (pronounced “say-zin”) Registry which has tracked transfers since 1617 and continues today. This robust chain of title is one of the things that caused Piet Eichholtz of Maastricht University to study the Fransz house and, later, Robert Shiller (Yale University) to reference the Eichholtz data in his book “Irrational Exuberance” (pub. 2000).

Clearly, a chain of transfers with their associated purchase prices is important to develop any supportable opinion of value, but it is especially important when applying the Transaction Model. It is needful, but it is not enough. More is required than simply the five elements recorded in the Dutch title records. The property must not have been materially altered between transfers. For example, it is possible value increases might have been due to the two additional stories added by the prior owner, no? So the second thing required, after the chain of title, is that the property remained essentially unchanged during the period under observation. It is not necessary for the home to be a time capsule, to be absolutely historically accurate, or to be unchanged in the least degree for the last several centuries. We’re not valuing a museum. That the earlier families emptied their chamber pots into the canal and later families benefited from a functional sewage system is not material. Waste disposal via canals or via sewers is functionally similar from the perspective of the homeowner, if not the swimmer. What is required is conformity to a Constant Quality Index (the Laspeyres Index). This index responds to the question, “What would be the sales price today, relative to its price in the base year?” 

An example of the Laspeyres Index in practice: Assume a basket of groceries was purchased in the base year and the price recorded. That became the Base Year Price, and was given the value of 100%. A duplicate basket was purchased in subsequent years, and the price again recorded. To measure the cumulative inflation experienced by the original basket of goodies, one must first measure the change in price from the base year to the subsequent date. Giving the base year a value of 100 greatly simplifies the matter: simply subtract 100 from the subsequent year’s value. The result will be the cumulative inflation (as a percentage) for groceries since the base year. In this case, if we assign a value of $100 for the year 1625 and in 2020 find a duplicate basket of groceries cost $275, there has been 175% inflation over the past 395 years – (Current value of $275 minus base value of $100).  Cumulative inflation has pushed the price of the subject up 175%.

Such a number might be used to demonstrate how much of the total increase in value is due to inflation. 

Any increase in value in excess of inflation would be assigned to physical changes in size (enlarged kitchen) or amenities (hammam). The Laspeyres Index strives to keep changes in size, amenities, and location constant, thus any change in value, ipso facto, must be due only to inflation.

The important thing regarding the Herengracht Canal is that it has been part of Amsterdam’s most desirable real estate since it was developed. It is the place where powerful people, whether 17th Century spice brokers or 21st Century international bankers, have chosen to live. This means that the vital question of value movement due to change in location desirability is not applicable. 

Furthermore, the size of the Fransz house is the same as it was in 1625. 

And the house’s amenities are common to its equally desirable substitutes. No value adjustments are required.

The three critical elements of location, size, and amenities have remained materially the same since 1625. To put that date into perspective, that was roughly the year New Amsterdam (now known as New York City) was founded on the southern tip of Manhattan Island.  

 “Superstar Cities” – Not everyone accepts Schiller’s argument in “Irrational Exuberance” that housing prices cycle about an inflationary trend line. Richard Peach (Federal Reserve Bank of New York), Christopher Mayer (Columbia University), and Joseph Gyourko (Warton School) are among those who argue that Superstar Cities are so terribly desirable that they can “sustain ever-increasing prices compared with less-sought-after cities.” That sounds suspiciously like Irving Fisher (the father of today’s investment advisor, Ken Fisher) when he announced in 1929 “Stock prices have reached what looks like a permanently high plateau”. In his defense, a month before the Dow Jones Industrial Average had closed at 381.17, reflecting a 600% growth in the previous 8 years. The credibility of Mr. Irving’s forecast was impacted when the Great Depression started only a month later. 

Schiller responded to the Peach-Mayer-Gyourko position thusly, “Looking at the Herengracht data is very instructive because you can see 50-year intervals of growth, then it turns around. That’s more realistic than the superstar-cities argument.” 

“The Herengracht Index” – In the mid 1600’s, the Dutch Republic was beginning its climb to global power. The Dutch traders, having a monopoly of trade with Japan and the East Indies, had become the middlemen between European nations and the Far East. For a period, Amsterdam’s population was doubling every 20 years (an annual growth of 3.53% compounded). Pressed for space, the city leaders authorized the three concentric canals referenced above (Canals, vide supra) that would arc around the city. The land along the canals would be divided into housing lots. It was a massive undertaking that doubled the size of the city and diverted the river. It required driving thousands of piles dozens of feet below the land surface and building scores of bridges . . . and thousands of brick houses. It took fifty years to complete.

Early on, the master plan marked the Herengracht, the new canal closest to the city center, as the most desirable. Lots were larger than they were on later canals. Noisy and smelly trades were prohibited. Wealthy traders (Nutmeg! Japanese porcelain!), snapped up lots and built their large homes. In the five years 1628 – 1633 the economy soared and real, inflation-adjusted prices of houses along the Herengracht doubled. Think of the prices of prime United States locations between 2000 and 2007. 

Then the tulip mania met the plague. Connected with the conspicuous wealth flaunted by traders and ship owners, the Dutch had begun speculating on everything from tobacco to tulips. Over one 30 day period in 1637 the price of White Crown tulip bulbs shot from 64 guilders per 8 ounces in January to 1,668 guilders (which was the price of some houses in Amsterdam) in February. Then the bottom dropped out, and the market stabilized at around 38 guilders – about half the beginning price in the previous January. It has been argued that the plague, which hit the Netherlands in 1635 and arrived in Amsterdam in 1636, wiping out 14% of the population (~ 17,000 deaths) contributed to the ending of the tulip bulb bubble by creating a “gambling binge” mentality. 

These two concomitant catastrophes, one physical (fewer people) and the other financial (less money), saw housing prices drop 36%. Piet Eichholtz says that sort of thing, in which unpredictable disasters combine unpredictably, is relevant today. Think of COVID-19 and the Bubble-of-Everything: Nassim Nicholas Taleb’s “Black Swan” writ large. This should not be understood as a claim that housing crashes always follow a calamity. Sometimes they do, and sometimes they don’t. They didn’t in New York City, after September 11th. Home prices there have soared since 2001.

Continued next month . . . 

This article is for informational purposes only and is not intended as professional advice. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property. If you are thinking of refinancing or purchasing real estate Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected]