House Prices and Fundamentals: 355 Years of Evidence

This paper examines the long-run relation between prices and rents for houses in Amsterdam from 1650 to 2005.We estimate the deviation of house prices from fundamentals and find that these deviations can be persistent and long-lasting. Furthermore, we look at the feedback mechanisms between housing market fundamentals and prices, and find that market correction of the mispricing occurs mainly through prices not rents. This correction back to equilibrium, however, can take decades.