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Reaching for Yield and the Housing Market: Evidence from 18th-Century Amsterdam

Journal: Journal of Financial Economics

Date: 20230601

Author: Korevaar, Matthijs

Abstract:
Do investors reach for yield when interest rates are low and does this behavior affect the housing market? Using the unique setting and data of 18th-century Amsterdam, I show that reach-for-yield behavior of wealthy investors resulted in a large boom and bust in house prices and major changes in rental yields. Exploiting changes in the supply of bonds, I show that investors living off capital income shifted their portfolios towards real estate and other higher-yielding assets when bond yields were low and decreasing. This behavior exacerbated house price volatility and increased housing wealth inequality.

Link: Google Scholar

Key Findings

Reach-for-Yield Behavior

During periods of low interest rates, wealthy investors shifted investments from bonds to higher-yielding real estate, leading to housing market volatility and increased yields

Housing Market Impact

House prices doubled during the boom period (1714-1740), while rental yields declined significantly, particularly for lower-grade properties

Wealth Inequality

The share of housing wealth owned by the top 10% increased from ~33% to ~50% during the boom period, with effects persisting after the bust

Housing Returns During Market Cycles

  • Pre-boom period (1701-1713) showed stable returns with 3.9% average total return
  • Boom period (1714-1739) saw significant price appreciation with 6.2% average total return
  • Bust period (1740-1748) experienced negative returns averaging -1.8%

Portfolio Composition by Wealth Group

  • Real estate dominated portfolios of middle-wealth investors (25-75th percentile)
  • Government bonds were concentrated among the wealthiest investors (top 25%)
  • International investments emerged among very wealthy after 1720s

Housing Wealth Inequality Over Time

  • Housing wealth concentration increased steadily during peace period (1714-1740)
  • Top 10% ownership share grew from approximately 33% to 50%
  • Inequality levels remained elevated even after market downturn

Contribution and Implications

  • First study demonstrating how reach-for-yield behavior can drive housing market cycles
  • Shows how low interest rates can lead to increased housing wealth inequality through investor behavior
  • Relevant for modern markets with persistent low rates and growing investor participation

Data Sources

  • Returns data visualization based on Table 1 showing geometric returns across different time periods
  • Portfolio composition chart constructed using data from Figure 2 showing investment portfolios by wealth group
  • Inequality trends derived from Figure 8 showing evolution of housing wealth concentration over time