Can real estate be a good proxy for the *true inflation rate and perhaps even justifiably exceeding it? (*The real inflation rate and not the doctored CPI numbers) When home builders are building a house, all the man hours of construction and building material will always be required. So as inflation rises, so should the value of an existing home. But where I believe things get out of whack is when there is great demand for land, pushing land values skywards in a given area with virtually no new or existing supply since no new land is being created in those same areas. ie. Manhattan, San Francisco, etc. In addition, the problem is made worse by zoning restricting densities, so the builders are forced to purchase a minimum amount of land per unit, and passing these costs on to homebuyers. But in the end, while land values may have high variances in the short to mid-term (boom,bust) over the long run, real estate land values should do two things: grow at atleast inflation, and grow at a rate in order to have supply=demand, considering there is no new land being created in the prime markets and that the desire and buying power for getting into those prime markets continues to increase. Let's say that we are on the verge of a Real Estate bubble in America imploding. Even if prices do collapse, the high demand for the prime markets will still exist if not increase, however the supply will remain the same. Also given the high real-inflation rate we see in America, it should not take too long for prices to return to pre-bust levels and this time justifiably.
Although I don't believe in the housing bubble, housing prices have outpaced real inflation given by any sensible indicator by several multiples for a long time -- http://themarkettruth.blogspot.com/
The expensive real estate exhibits the most volatiltiy during the cycle typically. If the prices collapse it will be the high end stuff making the news, the blue collar stuff won't be so much of a problem for the owners.
Your question is almost meaningless. You didn't mention location, nor timing. Your answer depends completely on whether you purchased in US or in Japan, in California or in Kansas, in LA or in Barstow, in year 1995 or year 2005. Each property / neighborhood / city / county / state / country has its own appreciation / depreciation index. And don't forget utilities, property tax, HOA fees, insurance, any rental income, and other maintenance costs. Unless you have factored in everything, your question is simply impossible to answer. We are not talking about the S&P 500 here.
Your suggestion on whether real estate be a good proxy for the *true inflation rate and perhaps even justifiably exceeding it, is a bunch of mumble jumble. You said "over the long run, real estate land values should do two things: grow at at least inflation, and grow at a rate in order to have supply=demand, considering there is no new land being created in the prime markets and that the desire and buying power for getting into those prime markets continues to increase." You provided no basis for the first thing - grow at at least inflation. The market price is determined purely by supply and demand. Of which you stated as the second thing. What's new here? So, I am back to answering your thread, can real estate justifiably beats inflation? That question depends purely on the local supply / demand equation, not inflation. Take the example of Japan. The real estate prices have gone down since the 1980s. Another example is West Virginia where prices have been relatively flat for a long time. Do you think your proposition is still valid? The inflation can't be zero in West Virginia.