Why does Real Estate appreciate?

Discussion in 'Economics' started by granville, Jun 18, 2006.

  1. First off - Happy Father's Day to all you dads...

    I can understand why stock prices appreciate. The underlying companies grow in terms of earnings. But if new houses are being built to meet demand, what economic principles are at work to create a long bias in housing?

  2. Location mixed with a desire to live in that location.
  3. It's not really the "houses" per se that are appreciating in my opinion. Rather, it's the land. And of course, you know the old saying, they aren't making any more of it.

    And I would also say that with long term dollar weakness, tangible assets denominated in dollars would tend to appreciate.

    Finally, growing restrictions on land use within most major cities puts an upward tilt on value.

  4. Banjo


    The labor and materials to create housing are continually appreaciating, there is always a relationship to new construction, a replacement value of sorts. Same goes for autos , there is a relationship between the cost of used cars to new cars. Natural inflation built into an economic system. The ebbs and flows of supply and demand further exacerbate the situation.
  5. Location, location, and location.
  6. "There is little evidence that real estate appreciates in the long run."

    The above quote is from an adjunct Professor at my business school who owned $60 million worth of apartment buildings.
    He gave some statistics regarding the price of real estate in Rome
    going back two thousand years.

    I think you ask a good question. Why should real estate appreciate? Sure, they are not making any more land, but there is plenty of land out there that is not being put to any use.
  7. alanack


    Population growth.
  8. Lucrum


    There is a quote from a famous comedian during the 1920's or 30's I think that went something like this.

    When asked about investments he replied:

    "Buy land, they're not making it any more".
  9. Houses don't appreciate.
    The dollars used to buy them depreciate.

    If you look at housing "appreciation" rates over the very long term and across all locations, it's about 0.5% above inflation. Negligible. So basically: appreciation = inflation.

    The constant rise in home values is an illusion. Then you might ask that if there really is no such thing as appreciation and the value in real terms is the exact same over time, why have so many people become rich off of real estate? The answer is: they've leveraged inflation. By borrowing most of the cost of the house, they are earning the inflation rate on a much larger principal amount than their investment. Leveraged inflation.

    Of course, new popular locations will go up faster relative to other areas, but that should probably be called "location premium" rather than "appreciation". This gives you even more leverage than the leveraged inflation because the location premium is inflating too.
  10. Interesting and it makes sense. How long is 'long term' here? When/where did you first come across this argument?
    #10     Jun 18, 2006