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I Disagree
Graph of the week

Graph of the week

17-02-2017 | Insight
Best investment ever!
  • Jeroen Blokland
    Jeroen
    Blokland
    Portfolio Manager, Robeco Global Allocation team

After years of research, we finally have a verdict: if you had 16 pounds in Great Britain in 1360, buying a house would have been the best investment ever.

https://www.globalfinancialdata.com/gfdblog/?p=3994

In fact, this is so obvious from the graph, that I could leave it at that. The graph illustrates movements in average UK house prices from 1290 onwards. The market struggled a bit in the first hundred years due to the plague and various wars, but from 1360 onwards, things generally started looking up. The rise over the last 100 years is particularly impressive: that 16-pound investment is now worth 200,000 pounds!

But, of course, I won't leave it at that. As simple as it looks, this graph is actually quite tricky. For starters, is there such a thing as an ‘average’ house? When changes in house prices vary so much by city and region even in a country as small as the Netherlands, it clearly can’t exist in the UK. For example, buying a 16-pound house in Rye ─ then a strategically important port on the south coast (now ancient history) ─ or buying a house for the same price in the Chelsea countryside (now downtown London) ─ would have had completely different results. Apart from that, how many houses that were on the market in 1360 are still standing today and how many of those still meet our modern standards and requirements? An average house in 1360 was obviously completely different to one in 2015. It would have needed a lot of renovation and refurbishment just to keep it standing for the last six centuries. And that is before I even mention fires, changes in local planning and war, the effects of all of which I'll conveniently disregard. I'd be surprised if even 0.01% of those houses still existed. When I Googled, I did find a number of examples, but these are now considered unique properties. For example, the 2010 asking price for the UK's oldest ‘continuously occupied house’ (dating back to 1148) was 1.25 million pounds. Unfortunately, they didn't mention whether the house could have sold for 16 pounds in 1360.

And can you imagine 14th-century officials showing up to verify the property's dimensions? Discussing the differences in price per square yard in Cumbria versus Devon, noting the unique property's 'special features', such as the handy ditch that doubles as a toilet? Of course not. In fact, the site where I found this graph conscientiously states that the data from the years 1290 to 1895 was based on rents, rather than sales prices. In short, it may look good, but as with any graph going back more than a century or two, you seriously have to wonder what use it is.

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But anyway...

Now that we understand the shortcomings, for the sake of argument, let's assume that the graph is basically correct. Would it have then been such a good buy? Clearly, 16 pounds sounds like a bargain, but once you do the math, the whole thing is a bit disappointing. I don't have the exact underlying data, but assuming the house you bought for 16 pounds was worth 200,000 pounds 660 years later, then it would have appreciated by an average of 1.4% per year. This ignores the effects of inflation, because we are looking at nominal prices. Fortunately, the site also has a graph showing changes in real house prices over time, which I have included below.

https://www.globalfinancialdata.com/gfdblog/?p=3994

Again, I can't really see those same officials in 1360 determining that year's exact consumer price level: presumably, the concept of a consumer had yet to be invented. So this inflation measurement should be taken with a grain of salt. With that in mind, the graph shows that real prices rose from 2,400 to 70,000 pounds, amounting to an average real increase of 0.5% per year

Is that a lot?

Is that a lot? If you compare it to average returns on equities or government bonds, it really doesn't seem like much. For example, between 1900 and 2015, the real return on equities averaged 4.4% in the 20 countries with available data, compared to a real bond yield of 0.8% during the same period. The only problem with that comparison is that we have limited our focus to just the last 115 years, a period during which house prices also shot up, as shown in the graph. Perhaps the incredible growth occurring over the last century has distorted our frame of reference. It should be noted that as we are looking at real returns, the sharp rise in prices does not in itself ─ contrary to popular opinion ─ have much to do with the increased money supply, but rather, it reflects the unprecedented rise in prosperity in countries such as the UK.

How accurate the graph is, is anyone's guess, but interestingly enough, a similar graph exists illustrating house price trends in the Netherlands. This index, originally devised by Professor Eichholz, is based on over 4000 sales transactions carried out between 1628 to 1973 for houses on Herengracht. This makes the data seem quite a bit more reliable. Not only does it represent actual house prices as evidenced by transactions (not rents), but the comparison with an ‘average house’ is considerably more realistic: the sample is much more homogeneous and always consists of the same properties. Obviously, I can't claim to know which country's inflation data is better.

Here's how it looks (duplicated from NRC Handelsblad). As you can see, the graph stops just before the 2008 housing crisis erupted. No real upward trend here, either, until after World War II. Bearing in mind the correction that occurred after 2008, you might even argue that there never was an upward trend at all, but that real house prices fluctuate within a broad bandwidth. So the claim that houses are the best investment ever, certainly doesn't seem to be supported by the available data.

Is that a lot? If you compare it to average returns on equities or government bonds, it really doesn't seem like much. For example, between 1900 and 2015, the real return on equities averaged 4.4% in the 20 countries with available data, compared to a real bond yield of 0.8% during the same period. The only problem with that comparison is that we have limited our focus to just the last 115 years, a period during which house prices also shot up, as shown in the graph. Perhaps the incredible growth occurring over the last century has distorted our frame of reference. It should be noted that as we are looking at real returns, the sharp rise in prices does not in itself ─ contrary to popular opinion ─ have much to do with the increased money supply, but rather, it reflects the unprecedented rise in prosperity in countries such as the UK.

How accurate the graph is, is anyone's guess, but interestingly enough, a similar graph exists illustrating house price trends in the Netherlands. This index, originally devised by Professor Eichholz, is based on over 4000 sales transactions carried out between 1628 to 1973 for houses on Herengracht. This makes the data seem quite a bit more reliable. Not only does it represent actual house prices as evidenced by transactions (not rents), but the comparison with an ‘average house’ is considerably more realistic: the sample is much more homogeneous and always consists of the same properties. Obviously, I can't claim to know which country's inflation data is better.

Here's how it looks (duplicated from NRC Handelsblad). As you can see, the graph stops just before the 2008 housing crisis erupted. No real upward trend here, either, until after World War II. Bearing in mind the correction that occurred after 2008, you might even argue that there never was an upward trend at all, but that real house prices fluctuate within a broad bandwidth. So the claim that houses are the best investment ever, certainly doesn't seem to be supported by the available data.