Price Appreciation

Price appreciation is the simple phenomenon of real estate prices and property value increasing over time. The price appreciation in real estate property depends on several factors such as location, locality, nearby resources and facilities, demand and supply of the housing market, and the significant time factor.

Real estate property and land ownership are some of the most important types of investment. It typically works as a long-term investment in which the price appreciation indicates a rise in value, eventually offering good returns based on the value at which it was first bought. Property owners can hike the real estate prices by implying renovation and repairs.

Key Takeaways                                                               

• Price appreciation is the inflation real estate market and land or property ownership experience over time.
• Seeking and buying a real estate property to sell later after realizing its appreciated price is one of the most common real estate investment practices.
• The factors that affect price appreciation include time, locality, future development rate, interest rates, supply and demand etc.
• Without price appreciation, the real estate market would collapse as there would be no returns, profit, or point in investing in property.
• Unlike price appreciation, price depreciation is the gradual loss of real estate prices over time.

Price appreciation is the increase in the value of a property, real estate, home, or land with time. When the price of a property appreciates, the owner enjoys its benefits both directly and indirectly. Apart from the stock market and other financial products, real estate is one of the most common investing options for people. A property can belong to anyone, from an individual, government, company, or other entity, and it depends on the owner how they want to use it.

Real estate investors seek land or home properties at low prices or in localities with high potential for future development plans and then either rent them or sell them at a higher price, resulting in price appreciation. Although many aspects cause an average home price appreciation, time is fundamentally the most important factor. It is a general tendency in the real estate market that with time, the price appreciation of land or property increases. However, the rate at which it increases depends on multiple other factors.

The key limitation in the real estate market is the high capital requirement and long-term complex process. An individual looking to buy a small house still needs a lot of cash. However, loans are available; which bind the borrower for a long time in monthly payments, and only after years of proper repayment can the house be owned by them with no liabilities.

House price appreciation not only works in buying or selling but also plays a key role in renting a place. A tenant is always concerned with the facilities, amenities, and good neighborhood that they receive with a house, and therefore, an owner can charge more rent based on it. However, there is also a possibility of house price depreciation, which occurs when the property is isolated, has no facilities, is in bad shape, and has poor maintenance. According to the Census and Economic Information Center (CEIC), a global data company, the average home price appreciation in the US is 5.4%. In September 2021, it reached 18.5% at its highest.

The factors of price appreciation are -

• Time: Time is the primary and most significant factor of price appreciation. Anywhere around the world, real estate is considered one of the important long-term investments bound to offer good and exponential returns with time.
• Locality: A house in the right place, with the proper neighborhood, nearby facilities, and amenities, always attracts customers. The posh the locality is, the higher the price appreciation is observed, especially in the real estate market.
• Location: People often confuse location with locality, but both are different. While locality comprises the neighborhood of a real estate property, location is the place where it is built. When people are choosing to buy a house, they are planning to settle in that location and hence, the place must match their requirements.
• Future development plans - Land or houses in a deserted area may be bought at a cheaper rate. Still, future development in the same area or around the property can increase its price over time. This factor is linked with the time factor, as development takes time.
• Interest rates - The bank interest rates and benchmark indexes are particularly followed in real estate. People usually take home loans to buy property, so if the interest rates are high, people tend to avoid buying property for a certain period, indirectly affecting the price appreciation.
• Supply and demand: In the housing market and any market, supply and demand dramatically affect price appreciation. Suppose there is a home with a nice space, well furnished, beautiful garden, posh locality, and the only house left in the locality for sale. Such a house is expected to experience price appreciation.

The formula that is used to calculate the appreciation in the value of a real estate property is as follows:

Price appreciation formula = Current value - Purchase price

Price appreciation in percentage = Change in price/Purchase price x100

Here are two examples of price appreciation in real estate:

Example #1

Suppose Jennifer, who works in a software company, recently won a lottery and received $150,000 in cash. She does not want to spend it all and, therefore, wants to invest a major part of it while using a small amount of money on lifestyle and resources. Jennifer first thought of investing in stocks but had no knowledge about it. Upon researching, she came across real estate investments and decided to buy a home property for $135,000. She used the rest of the $15,000 on her studies, present apartment, car repairs, maintenance, and utilities.

After three years, Jennifer finally decides to sell her home property and decides to check on the current market value of her property investment. She is fascinated to know that the current price of her home is $180,000. To understand the price appreciation, Jennifer calculates -

Current value - purchase price = 180000 - 135000 = $45000

For the same, if Jennifer wants to calculate the house price appreciation in percentage, the calculation goes as follows -

Change in price/Purchase price x100 = 45000/135000 x 100 = 33.3%

Therefore, Jennifer's property's price appreciated by 33.3% in three years and $45000 in value.

Example #2

According to CoreLogic HPI, a company known for leading public records, servicing, and securities in real estate databases, the annual US home price appreciation will continue to grow even in the last quarter of 2023 to reach a rate of 6.8% over the year in January 2024 and relax to 4.3% by June 2024. CoreLogic incorporates repeat sales transaction data of nearly five decades to analyze home price trends and releases a 30-day report on the first Tuesday of every month with an average five-week lag.

According to its August 2023 insights, the US home prices were to reach new highs in June, 41% above pre-pandemic levels. The report suggests that June's US median single-family home price was $37600, with California at $720,000, the District of Columbia at $680,000, and Massachusetts at $583,500 leading the country. In June, the 2.3% yearly home price appreciation of attached properties was 0.9% points higher than that of detached properties (1.4%).

The main differences between price appreciation and price depreciation are -

• Price appreciation is the increase in value over time. In comparison, price depreciation is the decrease in a property's value over time.
• Price appreciation is focused on the housing market inflation. In contrast, price depreciation concerns the deflation of real estate prices.
• Real estate investors use price appreciation to profit in the housing market. On the contrary, price depreciation is observed as a loss in the value of a property.
• Price appreciation occurs due to location, locality, facilities, maintenance, facilities, repairs and renovation. On the other hand, price depreciation occurs because of bad location, distance from the main area, bad conditions, and no maintenance.