Many home owners in the Netherlands are convinced that long term house prices only can go up, even when corrected for inflation.  Many studies confirm this. These studies cover usually house prices of at most the past 50 years and they usually arrive at an average annual price increase of about 7%. After correction for the inflation and the yearly improvements in most houses the corrected average annual real price increase still seems to be about 2%. Two main causes are given for this price increase: in the Netherlands building does not increase when house prices increase, and demographic trends will keep stimulating the demand. 

Today I read a story about house prices along the dutch Herengracht (Gentleman's Canal) in Amsterdam in my newspaper, NRC Handelsblad. This story discusses an investigation of Real Estate Professor Piet Eichholtz that covers the house prices along the Herengracht since 1650. In this story he claims that the Herengracht has always been an A-location, so the prices are not influence by the rating of the location. The price diagram in the newspaper supports his conclusions: 

• long term house prices are just as volatile as share prices. The difference is that they go up and down over centuries rather than over months, but they do go up and down just as much as shares.
• house prices are not always increasing. The prices can go down just as much as they have increased in the past 50 years,
• house prices go down a lot in periods of war and economic crises. Such events reduce the population density which reduces the demand for houses,
• Currently the average price of canal houses at the Herengracht is historically high. The last time similar prices were achieved was in 1736. The current house prices seem to be at least 30% above the historical average.

Eichholtz still agrees with the main stream opinion that house prices will continue to rise in The Netherlands. But he also warns to be cautious and not to take ever increasing house prices for granted.

Unfortunately the article does not say anything about the influence of interest on the house market. Neither does the article mention the fact that the interest on a mortgage is tax-deductible in the Netherlands. Obviously house prices would not be their 300-year peak without this tax advantage and the low interest rate of today.

When I buy assets I rather do not want to buy them at a 300-year peak price. So let's have a look at which factors can cause the house prices to start falling:

• A big economic depression. After the dot-com bubble house prices in Amsterdam went down a little bit, but after a few years they continued rising. So I don't think this is likely.
• Rising interest rates. Currently interest rates are already higher than a couple of years ago. It seems that central banks have to continue to rase interest rates in order to fight inflation.
• A decrease in the population. Right now more people leave the Netherlands than immigrants enter. At the moment there are several reality shows around the thema "We are leaving The Netherlands" on dutch TV. Women in the Netherlands get less children than necessary for replacing the previous generation as well. It could be that statisticians are wrong when they say that it takes at least another 30 years before the population really starts to decrease. Instead it could be 25 years or even 20 years.
• More violence. We are probably not in the times of large scale wars any more. But small scale violence such at the attacks on the WTC Towers in New York is still possible and might have a big influence on the economy.
• Effects of Global Warming. Most of the Netherlands is below sea level including Amsterdam. Currently sea level experts estimate a moderate rise, that should not cause much problems in The Netherlands. But if the Global Warming turns out to cause a faster sea level rise then huge investments need to be made into the coast defense in The Netherlands. This could trigger a economic crisis and therefore falling house prices.
• Changes in the fiscal treatment of house ownership. Currently house owners can deduct the interest of their mortgage from their gross fiscal income. This effectively mean that they only have to pay 48% of the interest. It is very difficult to change such a system without causing an immediate crash in the real estate market. Nevertheless the system has been made less generous already and certain political parties have plans for more reductions in these tax benefits.