What is appreciation in real estate?

Real estate appreciation refers to an increase in the value of a property. This can be due to many different factors, including changes in the market and inflation. Demand is the strongest factor. When the demand for real estate is higher than the supply, its value will go up. The purpose of real estate appreciation is to measure how much the value of a property has increased over time. Investors can use this information to decide on buying, selling, or holding properties.

It can be measured through the change in the price of a property from one period to another. For example, if a property was bought for $100,000 and is now worth $120,000, it has appreciated by $20,000. Historical real estate appreciation charts help show economists and analysts how property values have changed over time. These charts can be used to predict future trends.

The National Association of Realtors reported that the median price of homes rose an average of 6.4% per year between 1968 and 2004. A drastic rise in home prices occurred recently between the years 2020 and 2021. Between those years, the median sales price of existing homes rose by over 17%.

Factors that cause property price appreciation.

Infrastructure development
Infrastructure development plays a key role in price appreciation. Any new connectivity, transport, road, or transit hub, will act as a growth driver, as these are expected to bring more population and ultimately, more demand. Investors who time the market right, can get the most out of their real estate investment.

Upcoming or available amenities
Imagine a property without a parking space. Now, think of a similar property, with a parking space. This additional amenity can create a price difference of 10%-15%, especially in metro cities where parking in residential colonies may be a hassle. Property owners, who continue to upgrade their property, can get a better rate than the prevailing market rates.

Local development
For a property market to appreciate, it is very important that the local neighbourhood and the social infrastructure, support growth. A property in a gated residential colony with a functional residents’ welfare association (RWA) will be preferred to a stand-alone property located in a regular colony.

Policy changes
One major policy that directly impacts real estate appreciation, is lending rates. Cheaper cost of borrowing brings more buyers to the market, creating more demand and appreciation.

Economic situation
A country’s economic condition also plays a vital role in property appreciation. If the inflation rate is high, the value of money will reduce

Factors that cause property prices to appreciate

1. Demand and supply
When there is increasing demand for homes in a certain area, property prices go up if the amount of residential real estate projects being built to meet the demand is not catching up fast enough.

2. Fiscal inflation
Inflation is caused by excess money being in circulation, which essentially causes the value of money to reduce. When this happens, the prices for several input items like the cost of land, construction materials, construction labour and statutory building permits, also increase.

3. Cost of borrowing (interest rates on home loans)
The upward or downward movement of home loan interest rates, has a direct correlation to real estate appreciation. When the cost of borrowing increases, the demand for homes slows down because fewer buyers can afford the higher EMIs.
4. Property market drivers
With specific pertinence to residential real estate, the term ‘market drivers’ refers to all and any developments in an area that positively impact the desirability and convenience of living there. These can include:

The development of new office complexes in the area.
The arrival of a shopping mall or hypermarket. etc.

5. Population growth
Finally, the growth of population in a location obviously results in increasing demand for housing there. Increased demand directly translates into faster appreciation in real estate prices.

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