Does Real Estate Appreciate?

6 Replies

Michael Bluejay on his website

says that real estate does not appreciate faster than inflation. I think I mostly agree with his logic:

"When you think about it, it seems that long-term appreciation rates would have to be pretty close to the general rate of inflation. Because if appreciation were much higher than inflation, then it wouldn't be too long before no one could afford to buy a house! If workers make 3% more per year on average, but the price of homes goes up by 6% per year, then pretty soon homes become widely unaffordable."

This doesn't mean that you don't make money on the appreciation of real estate, especially if you borrow money to buy it. But, on average, don't expect appreciation to be more than inflation.

What do you think?

That "on average" doesn't mean a thing.  If I have $1,000,000 of appreciation dollars then I can buy "on average" a lot more house than someone that has no appreciation.

I am not sure what you mean Bob. I do realize that in certain places and in certain times real estate will appreciate faster than inflation. Just not over the long term.

I am going to contradict myself though. I do think that Michael Bluejay's argument is flawed because he did not distinguish between houses and real estate. A house is not real estate. The ground a house sits on is real estate. Houses depreciate over time, real estate appreciates. He did not take into account the fact that lot sizes have generally become smaller over time, even though houses are getting bigger. People may be spending about the same percent of their salary on housing over the years but they are living on smaller pieces of land. There are little old houses sitting on huge pieces of land that have appreciated a bunch, because the value is in the land, not the house. This is one of the reasons I am not interested in buying condos. 

@Clayton Sneider Though I agree that on average, dispersed over very large statistical samples, real estate will just match the inflation rate, that does not mean your return will just match inflation.  A key factor that those who point to Robert Schillers work often miss when he compares stocks to real estate is the norm in which we buy each of those asset classes.  Stocks are generally not purchased with leverage, while real estate is purchased with a high amount of leverage.  That leverage is what create returns far in excess of inflation.

You ever read John Schaub's book... Building Wealth One House at a Time.  

He compares the 10-year price difference for houses he chose to buy in The Strand (I think Manhatten Beach area) to houses in Compton.  They are just 17 miles apart.  

Russell: I totally agree that returns on real estate can far outpace inflation, and beat the stock market, even though appreciation might just match inflation.

I didn't read the article, but even if you just average inflation rates it is still a pretty good deal.  Someone else is paying off the debt you use to leverage assets that appreciate at the pace of inflation.  If appreciation is around 2-3% on average and you can borrow money to leverage the real estate purchased then your real cost of borrowing is likely 2 or so percent.  What other asset class do you know of where you can borrow for close to free, leverage 9+ : 1, and have inflation offset by the appreciation of the asset?  

The downside to all of this is that real estate is illiquid.  As long as you keep enough liquidity elsewhere in your portfolio this doesn't really present cash flow timing mismatches though.  

So who really cares if you only get inflation lift from your properties?  You're still benefiting from small inflationary policies and building your net worth much quicker than you could with most other investments.  

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