Predicting appreciation of real estate value 5 years down the road
We buy physical properties, as well as other investment vehicles like stocks, for the purpose of earning a return much higher than inflation 5 years or more down the road. As we defer consumption for the purpose of having something to live on when the day comes that we cannot physically work, or simply don’t want to spend our life working for money, there is a need to do more due diligence when it comes to substantial financial investments like in the case of real estate.
Economics 101 tells you that when there are too much money running after too few goods, prices of goods will rise. The same logic holds true for immovable properties also. Whether there will be significant appreciation in houses or any other types of properties depends on whether there are many dollars chasing after limited number of properties.
It is not hard to see that the big three, jobs, incomes and population, (not General Motors, Ford and Chrysler), accounts very much for how much price appreciate for more than 5 years down the road. However, this is only one part of the equation; the other part is supply and costs of land for housing and other types of real estate purposes.
“Buy land – they ain’t making it anymore.” Will Rogers.
Adding on to the fact that there is only a finite area of land on Earth, there is also environmental regulation that prohibits development that clearly endangers those already endangered species, from various plants to animals. This further adds in to the benefits of investing in real estate compared with stocks and especially bonds.
That is, assuming that supply of land is limited and costs of land also rises with time, then the following equation holds true,
Increase in Jobs + Increase in Income + More Humans = Higher Real Estate Values
This relation is easily seen and will be obvious to people involved in area of investment. The more people in a particular geographic area with jobs plus high income, rent levels and subsequently property values will be pushed up. People need a roof over their heads and places to shop and other avenues of entertainment. In short, employment is the basic foundation of purchasing power.
In another sense, what you are really investing is not really the real estate, but local and regional economy of that real estate. Other than growth, stability is also crucial, I think so far, no one invest a cool US$1 millions in war torn Afghanistan yet. In the case of a stable city, state and country, it is wise to check with respective places’ economic development agencies certain key data like whether the area is greatly cyclical in its economies and if the local area “GDP” increase with only little downturns.
It is not difficult to verify this fact from historical data, just take a look at cities with rapid growth in both jobs and incomes, and with limited supply of land, like Seattle, Washington and of course Hollywood.
As a result, the first thing to do when deciding to invest in a piece of property is to check the geographic area potential and its likelihood for expected growth in the three main parameters.
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Real estate is typically a stable investment for the long term. I agree, it’s a good idea to do your research, and be aware of the details of your investments. There are some great deals to gain in this economy, but we need to be sure that we are purchasing an investment.