Why do we think property prices always go up in the long term?
Member since 2022 · 119 posts · 52 votes
Why do we think property prices always go up in the long term?
Most Popular Reply
Ryan KellyBusiness Member
Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes@Amby Bhagtani one word - Inflation. Hamburgers used to be $0.15 in the 1950’s and are now $10-$12. Why? The cost of materials and labor to make the burger steadily rose each and every year with inflation. Housing is no different. The average new home coasts builders 10x what it cost them 40-50 years ago to build. This will keep going through the course of time. Markets will inflate at different rates, but overall housing will steadily get more expensive because the dollar will continue to lose value, so you’ll need more dollars to buy the same things in the future.
Ryan Kelly Group - Keller Williams5112 Reviews
46 Replies
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Scott Mac:
To me (just off the cuff) it seems like couple of reasons:
[1] Inflation moves prices upwards as peoples incomes increase with inflation (more dollars to spend, but not necessarily more buying power).
[2] In some areas (Hot Areas at Hot Times) there are more Buyers than Sellers--further increasing prices in these areas.
Just my 2 cents,
one thing that many people misunderstod is they think if there's inflation followed by recession then the real estate price would decline, but historically such as in 1970s, real estate appreciation in aggregation is always going faster during inflation after short term declines and this is what we see today where RE price in east coast/midwest keep increasing, only in west coast is reduced but since January already experienced uptick. In any other country that face significant hyper-inflation (>10%) home price going to sky as well, since it's the only hard asset that supply and demand is pretty much stable.
- Member since 2019 · 7k+ posts · 4k+ votes3y
so if you think about it ........
during low inflation era: home price is rising because of the more money being printed and mortgage rate is low
during high inflation era: home price is rising because it's hedge againts inflation and side effect of pent-up demand ( this was mentioned by @James Hamling long time ago in different thread).
Result: RE price going to sky until it hits a ceiling. - Member since 2019 · 7k+ posts · 4k+ votes3y
while the difference between stock index is .....stock index usually going up in low interest rate era because majority of index component are in financial and tech sector where they make more money if rate is low ; altough it's being negated by commodity stock which behaves in reverse way....
so truth to be told, best investing is still in real estate, it is buy once and you print money indirectly. - Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes3y
As long as we have a federal reserve inflation will always be a factor and asset prices will increase along with it. I'm not talking about the recent 15%+ inflation, I'm talking historic inflation since we left the gold standard.
Add: Supply/demand.
Housing in some form will always be in demand. Always.
More land is not being created (except maybe in Dubai) so it's a finite resource.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Carlos Ptriawan:
so if you think about it ........
during low inflation era: home price is rising because of the more money being printed and mortgage rate is low
during high inflation era: home price is rising because it's hedge againts inflation and side effect of pent-up demand ( this was mentioned by @James Hamling long time ago in different thread).
Result: RE price going to sky until it hits a ceiling.It's about taking a holistic picture vs a focus on individual factors.
For example; Back when this inflation started popping off many ran around freaking out saying a crash, CRASH because with rates going up so much, nobody would buy. By that 1 factor, I can totally see how someone with blinders on would come to that conclusion. But with a holistic vision, we see the massive shortage of units, and that inflation hitting RENTS just as hard, thus the alternative to home buying, renting, creating a force incentive to keep buying because the cost of housing is rather equalized, the incentive for home ownership still stands, despite rates, despite increase in housing costs, because the alternative, renting, is just as costly.
During Low Inflation, with cheap easy access to money, COMPETION goes up for available housing. Supply-Demand, it's simple, when Johnny has 10 apples and 18 people want apples, Johnny charges more. And when inflation is UP, thus making all the costs of inputs MORE, labor costs mroe, material is more, all that translates through to the cost of New Units. Now if we had ample supply of EXISTING units, yes, unit price could come DOWN. But we don't live in that world. We live in a shortage world for units. Thus, Pricing Basis is weighted towards new-unit supply pricing, which new-unit prices don't care how cheap people want to pay, it's based off cost of production.
If everyone wanted to pay only $100k for a home, and it costs bob the Builder $200k to build, Bob would simply NOT BUILD, because Bob has that choice, Bob doesn't have to build homes to hand them away at a $100k loss. But as long as people will pay $250k for Bob's homes, Bob will build them.
In a world of shortage of supply, it is the producer of supply who set's market price, because they are the main supply.
And when Susie-Q thinks about selling, she looks at what those homes are going for and she wants to get her maximum sold price, right, so she goes for it. The notion that those selling would take massive discounts is just ridiculous. The vary nature of selling is with attempt to get your MAXIMUM sold $.
Again, a holistic vision. Inflation with supply shortage = prices up. low cost of $ = prices going up via competition and demand. All roads lead back to 1 simple fundamental, DEMAND. As long as demand exists, so will pricing support AND elevation in pricing. All the other details of cost of $, that only impacts VELOCITY and volume. The amplitude of the movements.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Luka Milicevic:
As long as we have a federal reserve inflation will always be a factor and asset prices will increase along with it. I'm not talking about the recent 15%+ inflation, I'm talking historic inflation since we left the gold standard.
Add: Supply/demand.
Housing in some form will always be in demand. Always.
More land is not being created (except maybe in Dubai) so it's a finite resource.
Maybe FL should take a lesson from Dubai?
The Miami Palm islands...... That could actually be rather cool. But EPA would say it destroys habitat of a sea cucumber or something I am guessing.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @James Hamling:
Quote from @Carlos Ptriawan:
so if you think about it ........
during low inflation era: home price is rising because of the more money being printed and mortgage rate is low
during high inflation era: home price is rising because it's hedge againts inflation and side effect of pent-up demand ( this was mentioned by @James Hamling long time ago in different thread).
Result: RE price going to sky until it hits a ceiling.It's about taking a holistic picture vs a focus on individual factors.
For example; Back when this inflation started popping off many ran around freaking out saying a crash, CRASH because with rates going up so much, nobody would buy. By that 1 factor, I can totally see how someone with blinders on would come to that conclusion. But with a holistic vision, we see the massive shortage of units, and that inflation hitting RENTS just as hard, thus the alternative to home buying, renting, creating a force incentive to keep buying because the cost of housing is rather equalized, the incentive for home ownership still stands, despite rates, despite increase in housing costs, because the alternative, renting, is just as costly.
During Low Inflation, with cheap easy access to money, COMPETION goes up for available housing. Supply-Demand, it's simple, when Johnny has 10 apples and 18 people want apples, Johnny charges more. And when inflation is UP, thus making all the costs of inputs MORE, labor costs mroe, material is more, all that translates through to the cost of New Units. Now if we had ample supply of EXISTING units, yes, unit price could come DOWN. But we don't live in that world. We live in a shortage world for units. Thus, Pricing Basis is weighted towards new-unit supply pricing, which new-unit prices don't care how cheap people want to pay, it's based off cost of production.
If everyone wanted to pay only $100k for a home, and it costs bob the Builder $200k to build, Bob would simply NOT BUILD, because Bob has that choice, Bob doesn't have to build homes to hand them away at a $100k loss. But as long as people will pay $250k for Bob's homes, Bob will build them.
In a world of shortage of supply, it is the producer of supply who set's market price, because they are the main supply.
And when Susie-Q thinks about selling, she looks at what those homes are going for and she wants to get her maximum sold price, right, so she goes for it. The notion that those selling would take massive discounts is just ridiculous. The vary nature of selling is with attempt to get your MAXIMUM sold $.
Again, a holistic vision. Inflation with supply shortage = prices up. low cost of $ = prices going up via competition and demand. All roads lead back to 1 simple fundamental, DEMAND. As long as demand exists, so will pricing support AND elevation in pricing. All the other details of cost of $, that only impacts VELOCITY and volume. The amplitude of the movements.
You should really teach in a university Phd class. This explanation is world class in itself.
- Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes3y
Quote from @Amby Bhagtani:
I have a very basic question (almost sounds silly), I keep hearing property prices always go higher in the long term (not referring to short term fluctuations). Apart from that's how its been historically can someone explain to me how this works, when the worlds population maybe at the verge of declining.
Amby,
Not sure they do in real terms. In 1950 a median priced home was $7,354 and median household income was $2,990 or about 40% of the home's cost.
In today's term that would mean a household income of 120k owns a 300k house. Pretty spot-on in most parts of the country. Of course the coastal areas are the exception.
In 1930 a veal cutlet dinner cost 15 cents in a NYC restaurant.
One thing you can ALWAYS count on is government recklessly spending money that it doesn't have and constantly debasing the currency.
So, you have some issues of constrained supply increasing costs in highly desirable locations like coastal California. These locations may far outpace inflation. Everywhere else, short the area completely self-destructing (think Detroit), housing is simply a hard asset being chased by a fiat currency that is constantly getting weaker. A silver dime is now worth almost 20 times as much as when it was issued.
For this reason I'm still a buyer. Under contract for 2 more SFH's as we speak.
Respectfully, Gary
- Member since 2022 · 119 posts · 52 votes3y
Quote from @James Hamling:
Quote from @Amby Bhagtani:
I have a very basic question (almost sounds silly), I keep hearing property prices always go higher in the long term (not referring to short term fluctuations). Apart from that's how its been historically can someone explain to me how this works, when the worlds population maybe at the verge of declining.
I actually think this is a really interesting question. It's a important fundamental that most don't actually know or comprehend, and why later analysis struggles, because the foundation comprehension is weak.
Three main factors. And this fact of the 3 main factors, creates a 4th factor actually, because given several force factors to ascending price, it's insulates from downward fluctuations.
The first, let's address the population item. Let's say population stays dead flat, which it has not and is not today, but we will get to that later but for now let's say it stays dead flat. So your assuming that would mean housing would stay flat, 0 demand right? But that's assuming housing is eternal, which it is not. Housing is actually a DEPRECIATING asset, just as your CPA. yes, it's true, housing is a depreciating asset just like a car, cell phone etc, just on a longer timeline. Yes, housing wears out and, in time, will go to 0, ie be demolished. So housing at 0 added new demand via population, has an existing demand via REPLACEMENT. So keep this in mind, there is a cycle of replenishment for existing population base.
Now unto population growth. yes, population growth has been slowing BUT that's only specific to exactly that, the rate of growth, it's a skewing of facts because of math. Here is the thing, if you have a room of 100 people, and add 10 people to it, that's a 10% growth, right. Ok, now if you have a room of 1,000 and add 10 people, that only 1% right. So, is population declining? It was 10 people added before, it's still 10 added now, the ADDED people is the same BUT since the total size is so much bigger, the ADDITIONAL people seem smaller, way WAY smaller, because of the math. Now, the rate of growth is slowing, yes, but it's still the same # of people added.
During covid outbreak and "mass deaths" the US population still GREW. The US alone has about 400 million people, what looks like a tiny % growth rate is, in actual real numbers, millions of people.
Lastly is tied to the above two which is M2, or Money supply. Every day, and I do mean EVERY day MORE currency is put into the economy than the day before. There is a few ways this is done, most focus on just policy action that directly injects capital into the system BUT since the U.S. works on fractional lending that means every day countless banks across the country are "creating" new $ into existence every day via the lending cycle. This is, in theory, a good things because if the # of dollars floating around stood still, but # of people increase, that would mean less $ for each person and less to go around means less goes around, so less is done, and it creates DEFLATION and recession. To stay even, inflation is required. This is why the Fed today says it wants to get down to inflation around 2% and not 0. Inflation is good, when in balance.
But, since we have a all but constant inflation, that also means a steady devaluation of each $ "in the flow". So this last factor is that the real estate could actually stay flat in it's value BUT price goes up, due to inflation and the devaluation (purchase power) of each $ in your hand.
There is this eco-system that is intertwined, with feedback loops, that leads to the steady march of real estate prices going up over time.
So back to your population item. Even with population declining slightly, it does little to disrupt due to the cycles of replenishment, and fact of money supply. To get real and sustained deflation, population would need to meaningfully decline for a sustained measure, and in like kind money supply also get burned off at a matching rate or disproportionately quicker so to increase the purchasing power of each $. And than we have all the other details such as all resources for unit replenishment would need to stay in ample supply, labor to stay in ample supply, all this inputs in ample supply without any scarcity because again scarcity drives up value.
Yeah, it seems a really simple question but the reality ot the answer is far more detailed and interwoven than most ever think or want to think to be honest.
Thank you for taking the time to explain it so comprehensively
- Member since 2022 · 119 posts · 52 votes3y
Quote from @Luka Milicevic:
As long as we have a federal reserve inflation will always be a factor and asset prices will increase along with it. I'm not talking about the recent 15%+ inflation, I'm talking historic inflation since we left the gold standard.
Add: Supply/demand.
Housing in some form will always be in demand. Always.
More land is not being created (except maybe in Dubai) so it's a finite resource.
True, visited recently - land on sea :)
- Member since 2019 · 7k+ posts · 4k+ votes3y
Another thing that drove up the price:
- Home price is selling almost following auction model using "comps" model, for example, in my neighbor PSF is about $640, but I just sold my house for about $680, why ? because one buyer is waiving contingency and willing to pay for $40 PSF more. This, would upgrade the entire neighborhood to a new level even if that house is not as upgraded as I am. It's the willingness of buyer to throw money that makes neighborhood going up.
That's why home price PSF in Hawai could reach more than $1300 PSF, as buyer no longer cares about the intrinsic value. - Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes3y
Quote from @Carlos Ptriawan:
Yes, this in fact has no correlation with M2, M2 has no seasonality, but every year , Q1 and Q2 is always where there is uptrend in RE pricing and activity followed by flat or declining Q3/Q4.
The same seasonality happened all across US, from Hawaii to Milwaukee they're all reacted the same way. I guess people just buy house primarily to anticipate school season after summer so they buy in Q1 and Q2.
Correct, but the seasonality is more pronounced in colder climates, the curve is generally flatter in the south and markets that have less seasonal changes.
- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
Indeed, Real Estate markets all over the US are growing at a rapid pace. With population growth and an increasing demand for housing, it is no surprise that Real Estate investments make great sense in the current market. Historical patterns have been very useful in predicting future trends, and according to the data, Real Estate investments will likely continue to be lucrative for many years to come. With Real Estate prices on the rise due to increased demand, now is a great time to invest in Real Estate and take advantage of its potential returns.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Russell Brazil:
Quote from @Paul De Luca:
Quote from @Russell Brazil:
The world's population is no where near declining
An aging population presents a lot of problems for a society/the world.
"Population growth has declined mainly due to the abrupt decline in the global total fertility rate, from 5.3 in 1963 to 2.4 in 2019.[4] The decline in the total fertility rate has occurred in every region of the world and is a result of a process known as demographic transition. " - link
"At the global level, population decline is driven by low and falling fertility levels. In 2019, more than 40 per cent of the world population lived in countries that were at or below the replacement rate of 2.1 children per woman; in 2021, this share climbed to 60 per cent." - link
"Common worries are that population aging and decline result in labour and skills shortages, weaken economic productivity and innovation, slow economic growth and development, impose unsustainable fiscal pressure on governments and people, lead to cultural and ethnic shifts in societies, and weaken the political and military power of countries."
"Population growth is currently concentrated in the world’s poorest countries, which remain at a relatively early stage of the demographic transition, while some of the richest countries are beginning to see population decline. Such decline has happened before—mostly during wars and famines—but this time it is different."
Can you point to a year in which the population has declined? No you cant. Because it hasnt happened. The closest you can get to is the population increasing only 81 million in 2020 because the death rate spiked with covid. (Down from an 83 million general yearly trend)
Instead of looking at narratives that media like to create (in all subjects), its much more useful to look at actual data.
Or maybe its a misunderstanding in terminology in not understanding the difference between growth rate and population growth. In nearly all aspects of life, as a large number grows, the rate at which it grows becomes a smaller percentage. For instance its easier for a $10 million company to rise 1,000% to $100 million, than it would be for a $1 trillion company to rise to $100 trillion. But the small percentage growth of the $1 trillion company would be even a larger growth than the entire value of the $10m company.
So while 80 million becomes a small percentage of 7 billion...its still 80 more million than the previous year which is a damn lot of people. And a damm lot that need to be housed. (Though many wont be)
Russel already knows he's correct but here is the supporting data so everyone else can see it in picture.
- 3yJeff TumbarelloPro MemberReal Estate Broker · Fort Myers, FL · Member since 2008 · 1k+ posts · 323 votes
Quote from @Carlos Ptriawan:
real estate price is actually a derivative of M2 money supply.Quote from @Amby Bhagtani:
I have a very basic question (almost sounds silly), I keep hearing property prices always go higher in the long term (not referring to short term fluctuations). Apart from that's how its been historically can someone explain to me how this works, when the worlds population maybe at the verge of declining.
MOney supply could only be increased. That's the basic financial reason.Of recent, it is going down. https://fred.stlouisfed.org/se...
- Investor · Tampa, FL · Member since 2019 · 1k+ posts · 1k+ votes3y
Hey @Amby Bhagtani
It's a common perception that property prices always go up in the long term due to a few key factors. Over time, the value of money tends to decrease due to inflation, so property prices tend to rise to keep up with it. Additionally, as populations grow and there is limited land available for new construction, the demand for housing increases, which can lead to higher property prices in the long term. In areas with strong economic growth, there tends to be a higher demand for property, which can also drive up prices over time. However, it's important to keep in mind that while property prices do tend to increase over the long term, there can be fluctuations in the short term due to various factors.
- Real Estate Broker · Member since 2023 · 41 posts · 37 votes3y
Another way to think of this: what is the purchasing power of a given asset through time. The "price" goes up, but does the purchasing power? That's harder to answer - some markets yes, some no. It's all a horse race against inflation - the hard part is picking the fastest horse.
- 3yJeff TumbarelloPro MemberReal Estate Broker · Fort Myers, FL · Member since 2008 · 1k+ posts · 323 votes
Quote from @Joel Broyles:
Another way to think of this: what is the purchasing power of a given asset through time. The "price" goes up, but does the purchasing power? That's harder to answer - some markets yes, some no. It's all a horse race against inflation - the hard part is picking the fastest horse.
More like picking the horse that pays you the most to own it.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Jeff Tumbarello:
Quote from @Carlos Ptriawan:
real estate price is actually a derivative of M2 money supply.Quote from @Amby Bhagtani:
I have a very basic question (almost sounds silly), I keep hearing property prices always go higher in the long term (not referring to short term fluctuations). Apart from that's how its been historically can someone explain to me how this works, when the worlds population maybe at the verge of declining.
MOney supply could only be increased. That's the basic financial reason.Of recent, it is going down. https://fred.stlouisfed.org/se...
if you see the whole component of money supply, we start seeing very mild uptick in m2.
- 3yJeff TumbarelloPro MemberReal Estate Broker · Fort Myers, FL · Member since 2008 · 1k+ posts · 323 votes
Quote from @Carlos Ptriawan:
Quote from @Jeff Tumbarello:
Quote from @Carlos Ptriawan:
real estate price is actually a derivative of M2 money supply.Quote from @Amby Bhagtani:
I have a very basic question (almost sounds silly), I keep hearing property prices always go higher in the long term (not referring to short term fluctuations). Apart from that's how its been historically can someone explain to me how this works, when the worlds population maybe at the verge of declining.
MOney supply could only be increased. That's the basic financial reason.Of recent, it is going down. https://fred.stlouisfed.org/se...
if you see the whole component of money supply, we start seeing very mild uptick in m2.
Just having slow growth is basically a reduction, the entire system now depends on that growth. We live in interesting times.
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
It's all about supply & demand AND inflation.
Logical Property Management4.9459 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.