Why does Real Estate appreciate?

[pattersb]

because, in the end, it is the one thing that is most appreciated ... land. Everything else is just passing time.

 

[granville]

Quote from OldTrader:

....In other words, supply is extremely limited in some urban centers.

OldTrader

I was thinking more about this and I think this is a good point - along with the post "Population growth"...

Around any city that is growing, there IS a short supply of RE near to where people work. As more people move in, prices appreciate and urban sprawl occurs to accomodate demand.

 

[Pabst]

The tremendous appreciation in Real Estate has been global. Homes in London and Sydney and Sau Paulo have risen at the same rate as Miami or L.A.

Obviously the tale is other than just a weaker dollar.....

Quote from lucky_irish_man:

All that money the Fed printed went from equity inflation (rising stocks) to real estate inflation.

Real Estate hasn't gone up that much the purchasing power of the dollar has gone through the floor as Ben at the Fed drops money from helicopters.

 

[Trader5287]

Female pressures. Brutal, unrelenting, coming on earlier than ever these days.

Nobody happy unless momma happy - and momma wants a house, or a second house, and you better figure out how to get it.

 

[winter]

Quote from FireWalker:

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.

Since they have to pay interest on that amt they borrowed your argument does not make sense (unless you can borrow money with an interest rate below the rate of inflation).

 

[Smart Money]

Quote from granville:

FireWalker: You say that RE investors make a leveraged inflationary return. However, they have to pay the market interest rates against the amount they borrow (4%-8%) - which does not offfest the rise in inflation (2%-5%). Can you help me understand your reasoning better?

I got this one. If you buy a $100,000 house as rental property, and pay 10% down, you might pay 7% on your money, or 7% of $10,000 or $700 a year in interest on a borrowed downpayment. Even if you don't borrow it, that is the opportunity cost.

However, assuming that your tenants are paying your mortgage, if the value of the house goes up 4% a year, and the tenants pay down the mortgage 1% a year, you are picking up 5% a year in equity. But thats 5% of the $100,000, or $5,000.

So, that mean every year you make $5000 in equity, but pay out $700 for your downpayment, for a net of $4,300.

Ok, now think about this...you only put down $10,000 (not $100,000). So you're earning $4,300 return on a $10,000 investment. That is 43% return. Your payment is based on your investment, but your return is based on leverage...the amount of money you control.

Food for thought. If you buy a $100,000 house and rent it out for 14 years, you will roughly have $100,000 in equity, though it is not paid off. Theoretically, one can borrow $1,000,000 and buy rental property and have $1,000,000 of equity in 14 years. No way in heck I could save that much in my 401-K.

SM

 

[FireWalker]

Quote from winter:

Since they have to pay interest on that amt they borrowed your argument does not make sense (unless you can borrow money with an interest rate below the rate of inflation).

It's because the house price continually compounds at the inflation rate (as does the rental price), but the principal never changes.

Say you start out with:
100,000 house
1,000 payment
1,000 rent

In 10 years:
300,000 house
1,000 payment
3,000 rent

The buying power of the house price (100,000 vs. 300,000) remains the same. BUT. You're clearing 2,000 "extra" depreciated dollars for doing nothing but holding. Even if your original payment was interest-only and you never paid down the principal you could sell and make 200,000.

You've locked in dollars as of a point in time while everything inflates around you.

 

[murray t turtle]

Quote from OldTrader:

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.

OldTrader

============
Thats it Granville;
some volcanos making new land but not much supply ,
compared to demand.

 

[winter]

Quote from murray t turtle:

some volcanos making new land but not much supply ,
compared to demand.

Actually there is also some human activity creating new "land" : http://realestate.theemiratesnetwork.com/developments/dubai/palm_islands.php

but I'm sure that the loss of coastland due to the 2004 tsunami and katrina more then makes up for it.

 

[RXIS]

Quote from Smart Money:

I got this one. If you buy a $100,000 house as rental property, and pay 10% down, you might pay 7% on your money, or 7% of $10,000 or $700 a year in interest on a borrowed downpayment. Even if you don't borrow it, that is the opportunity cost.



What do you mean borrowed downpayment?