Is there a cap for real estate appreciation?

Question

If properties double in value every 5 years or appreciate by 8-10% if it's the right area do property values just go up infinitely? If a house in Seattle is worth 2M in 2023 and is only 2000 square feet in a good neighbourhood, will it's value go up by 300% in 30 years? I feel a house with it's size limitations and what it is should have certain limits for the maximum price it can appreciate to. Would a property like this be worth 8M in 2053? I feel like that price would make no sense and the value of the property would be capped at 4M or an earlier point and not be able to appreciate anymore. This is coming from the perspective of an investor.

Llewelyn A. · Answer

You can use an Excel Spreadsheet to get the COMPOUNDED Appreciation Rates easily. Here is a snapshot with the Formula you should use:

To the OP, you SHOULD use Historic Appreciation Rates as one evaluation.

HOWEVER, the best FUTURE Appreciation Rates are the ones that use can figure out intelligently.

For instance, what are the major developments happening in the target area within the next 10 years? What are the migration Patterns? What Legislation is being supported and likely to pass (for instance, rent control legislation will have a huge negative effect), etc.

I am a proponent of using your intellect to have a vision of the next 10 years.

Afterall, Squirrels know that if they don't gather than nuts and bury them for the future, they will die by the time the Winter is in full swing.

If a simple Squirrel can calculate for the future, why can't we?

Brad S. · Answer

I know, I was just being a bit lazy.  :)  But, I didn't realize the huge difference it would make on the longer term. Anyway, I found an inflation calculator to see how those properties kept up with inflation. The inflation adjusted price of the 1964 $64k house would be worth $626k today and the 1988 $140k house would be $359k

So, 1) $2.5m appreciated value vs $626k inflation adjusted value

2) $800k appreciated value vs $359k inflation adjusted value

And I do agree that we should do our best to determine areas in the path of progress, to set ourselves up for the best possible outcomes.

Brad S. · Answer

The short answer is NO, there is theoretically no limit to appreciation. But, it is relative and over the long run. Short term trends may temporarily reverse course, but generally, those desirable areas and homes will continue to appreciate, at least with the current laws and rules in place (i.e. ownership rights, tax benefits, etc). Some areas and/or houses may fall out of favor to the market, but the "value" is typically in the land the house is on.

And when you say "value" I'm assuming you mean "price." 2 different things. And you actually used both terms interchangeably. The "price" is how much something costs, the "value" is a relative measure to each individual, based on multiple factors, including intangibles. It sounds like what you are really asking is a general economics question.

The relativity is partly from inflation. In general, if you and other people are making more money, than you are more willing to pay more for what you want. So, if you just turn 16, you may have to buy a used car, for $3k due to your limited income/money, but when you get a job promotion and raise, at 25yrs old, you may decide to buy the brand new car you have had your eye on, even though it is 10 times as much as your first car, because you now can afford to.

Same with real estate. As incomes rise, more people can afford to pay more (a higher "price") for a home they want, in an area they want to be in. This creates competition/demand for those desirable homes and therefore, contributes to their higher "price." And, generally, over the long term, incomes and prices will rise.

Here's some real historical personal examples of rising prices:House I bought in 1988 for $140k, is worth around $800k today, at it's original 793sf, or could be worth $1.4m if it was doubles in size. Using simple math (not compounding), that is a 471% increase or 13% per year (not accounting for compounding)

Here's a better one:

Another local neighborhood: in 1964 houses were $64k ish, today conservatively around $2.5m3,806% total appreciation over 59yrs, or 65% annually (without compounding)

Bjorn Ahlblad · Answer

So much depends on what, where, and when. Folks who bought properties in certain parts of California over the last 30 years saw values go up 6x, 10x and more. Is that an indicator for the next 30 years? Maybe, maybe not.

For a time Detroit was the center of the Universe-yes Universe. Today it is nothing of the kind. Some parts of California have hardly broken even. At the end of the day most things are a crap shoot, values of anything can be unpredictable-RE stocks, bonds, paintings, antiques-whatever.

Never put all your eggs in the same basket unless you can afford to lose some, maybe most of them. Having said all that I am very upbeat!

Chris Seveney · Answer

@Mark Weins

As mentioned home appreciation  over last 30 years is under 5 percent which meant it may double every 15 years not five years.

It is not sustainable for homes to double every five years.

Brady Ferguson · Answer

Nobody can predict the future, but you can look at past economic data and see that its safe to say that over an extended period of time, you can expect appreciation between 3-6% per year on a home. I believe it is safe to say that will continue for the foreseeable future.

Is there a cap for real estate appreciation?

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