Sept. 23 (Bloomberg) -- The world's first recorded housing bubble started to inflate in 1628, when Dutch merchants jostling for prestige properties turned a 1.6-mile stretch of canal homes in Amsterdam into the most sought-after real estate in Europe.

The bubble burst within a decade, cutting the value of homes along the Herengracht, or ``gentlemen's canal,'' by more than a third, after tulip-bulb speculation wiped out fortunes and a plague killed about 20 percent of Amsterdam's residents.

The Herengracht's fate shows how shocks to an economy can change a housing market's fortunes, said Piet Eichholtz, a professor of real-estate economics at the University of Maastricht.

Eichholtz's index of house prices since the 17th century has been cited in the bestseller ``Irrational Exuberance'' by Yale University economics professor Robert Shiller as an example of the effects of a burst bubble. As concern grows over U.S. property values and the economic effects of Hurricanes Katrina and Rita, ``there are parallels with today's situation,'' Eichholtz said.

``The Herengracht is the Park Avenue of Amsterdam,'' said Eichholtz, 42, who teaches at the University of Maastricht, based in the city of the same name. The hurricanes ``may prove a worse disaster than the plague was at the time in Amsterdam,'' he said in a phone interview.

The birth of the Herengracht can be traced to the days when the Netherlands was one of the world's leading trading nations. It began in the 1620s as a residential area for families who wished to isolate themselves from the working classes. Tradesman involved in brewing, soap-making and whalebone cleaning were banned from operating in the area, records show.

The era produced artists including Rembrandt van Rijn, who painted ``The Night Watch,'' cartographers such as Willem Jansz Blaeu, who created maps that took ships between continents, and schools of higher learning including the Athenaeum Illustre.

`Golden Age'

``There is perhaps no other example of a complete and highly original civilization springing up in so short a time in so small a territory,'' historian Simon Schama writes of the ``Golden Age'' in his 1987 book ``The Embarrassment of Riches.''

Amsterdam's detailed records of property transactions allowed Eichholtz to compile an index of house prices dating back to the early 17th century. He discovered that in relative terms, prices on the Herengracht haven't gained since 1628.

In ``Irrational Exuberance,'' Shiller says the notion that house prices always go up is ``very wrong.'' Shiller uses the Herengracht index in part to assert that there is no long-term positive trend in the real value of homes.

Greenspan's Watching

The boom in U.S. property prices led Federal Reserve Chairman Alan Greenspan to say on Aug. 26 that the central bank was paying closer attention to the rising value of assets such as homes. In July, the median price of an existing home in the U.S. soared to a record of $218,000.

The Amsterdam economic crash of the 17th century was caused by two distinct events.

``What happened was a deep structural crisis in the housing market caused by economic fundamentals,'' Eichholtz said.

In the 1630s, the market for tulip bulbs, a symbol of status, peaked. Tulip traders earned as much as 60,000 florins a month, or $44,000 in current terms, according to a history provided on the Web site for the Limmen, Netherlands-based Hortus Bulborum Foundation, the largest garden reserve for tulips in the country.

Prices rose to the modern equivalent of more than $10,000 for a few bulbs before collapsing to almost zero. Simultaneously, a plague struck, in 1636 alone killing 14 percent of the city's people.

Prices Tumble

In the wake of the two crises, house prices became unsustainable, Eichholtz said. In real terms, his index, at 100 in the years 1628-29, more than doubles to 212.7 in 1632-33 and plunges 36 percent to 136.8 by 1638-39.

One residence, No. 297 Herengracht, was sold in 1620, before the bubble, for 1,602 florins, records from the time show. In 1634, before the bubble burst, it was sold for 3,007 florins. This compares with a transaction at No. 231 Herengracht, sold in 1632 for 3,725 florins and changed hands again in 1662, 25 years after the crash, for 4,000 florins.

Adjusted for inflation, the index shows prices rose only 0.2 percent in the 3 1/2 centuries since the bubble.

`Lost Elan'

The end came when a group of tulip-bulb merchants couldn't get the prices they wanted. The resulting slump in wealth and housing crash ended about 50 years of growth in Amsterdam's economy. ``Amsterdam lost its elan,'' Eichholtz said.

As the Netherlands struggled to rebuild its fortunes, England, threatened by the Dutch domination of sea trade routes, struck back. British troops seized Dutch possessions and by the end of the 17th century had forced its rival from North America and West Africa.

No price fluctuation on the Herengracht has since mirrored the price increases and declines of the 17th century.

The Herengracht today ``is still very sought after,'' said Rochus Westbroek, the founder of Westbroek Commercieel Onroerend Goed Advies, a real-estate adviser located on the avenue. Companies including Cie. Financiere Richemont AG, owner of the Cartier brand, also have offices there.

The most expensive house currently for sale on Funda, the largest Dutch property Web site, is a five-room apartment at No. 336 Herengracht, offered at 2.45 million euros ($3.1 million).

To contact the reporter on this story: Joana Quintanilha in Amsterdam at quintanilha@bloomberg.net

Last Updated: September 22, 2005 19:06 EDT