Real estate appreciation is the increase in the value of real property over time. It can refer to commercial or residential real estate, which appreciates faster than inflation.
The basic theory behind real estate appreciation is that land/locations are finite in supply while demand for real property grows. Appreciation occurs when the market price for property outpaces inflation.
In general, appreciation happens due to external or internal forces: External forces include economic and environmental factors such as population growth, income fluctuations, availability of financing, political stability, and tax policies. Internal forces could be the improvements made itself like renovations or simply the fact that there are limited supplies for certain types of property like beachfront property.
The appreciation for a particular property can be calculated by comparing the price at which it was purchased to the market value at present. For an individual homeowner, this would mean considering housing prices in the neighbourhood and how long they have lived on the property.
Appreciation rates vary from one geographic area to another and depend on several factors, such as location, economic environment, and supply and demand for properties in any given neighbourhood.
What are the Calculation Methods of Real Estate Appreciation?
Appreciation can be calculated in two ways. The gross method is based on the difference between the purchase price and the current market value, regardless of its associated costs or expenses. This approach also assumes that real property has been appreciated since it was purchased.
The net method is calculated by subtracting all closing costs, loan costs, and other expenses from the original purchase price. This method is more accurate because it considers any changes in value over time that accrued costs may offset.
It would be better to do it as a percentage to calculate the appreciation. First, subtract the initial home price and value from the property’s current value. Then, divide the result by the initial cost of the property and multiply it by 100.
Here is an example formula:
(Change in value / initial cost) x 100 = Appreciation as a percentage
Example:
You bought a house for $250,000 and now its value is $275,000.
$275,000 – $250,000 = 25,000 / 250,000 x 100 = 10% appreciation
What Impacts Real Estate Appreciation?
The calculation method of real estate appreciation is increasing due to the increasing value of the land. Several factors contribute to real estate appreciation. As the population grows, so does the demand for real estate. Income levels also contribute to the need for housing. Improvements made to the property or surrounding area may also contribute to appreciation.
Some other factors that affect real estate appreciation include:
- Improvements
- Location
- Market Conditions
- Interest Rate Trends
1. Improvements
The initial condition of the property affects its value. Renovating the property to be more valuable will contribute to real estate appreciation. As a house is being renovated, its market price increases and may gain when ultimately sold.
Improvements affect the property’s value because they add to its size and livable space or increase the property’s functional value. If the property is more valuable after improvements, it will appreciate.
2. Location
The location of a property affects its market price or resale value since properties located in desirable neighbourhoods are more expensive than others. They are closer to work or entertainment districts, have excellent schools if children are involved, and offer other amenities that are attractive to buyers.
People pay more for properties located in good neighbourhoods because they offer more amenities, and the demand is higher for this type of housing, which leads to a rise in the purchase price. Commercial real estate in downtown business districts also appreciates due to increased foot traffic and other factors that contribute to demand.
3. Market Conditions
Market conditions also affect real estate appreciation. When the market is booming, housing prices increase, and new construction shifts from residential to commercial space as real estate investors view land as a more profitable investment than houses or office buildings.
New construction declines when the market is down, and investors may shift their focus back to residential complexes. In a depressed market, people cannot sell their homes for as much as they would like, which leads some homeowners to take their properties off the market. Eventually, supply decreases, and prices stabilize.
4. Interest Rate Trends
Interest rates affect real estate appreciation because higher interest rates translate into higher mortgage payments for homeowners. Higher monthly payments mean that people have less money left over to spend on goods and services, leading to decreased demand for housing or commercial space.
However, as interest rates fall due to a decrease in bond yields or money market rates, the monthly borrowing costs also decrease. It makes it easier for people to purchase homes and may result in higher aggregate demand for real estate.
On the other hand, lower interest rates make monthly payments more affordable and can increase demand for housing or commercial space.
What is the Average Appreciation Rate for Homes?
Millionacres.com determined that the current average home appreciation rate is 2% every month. It means that for every month that a homeowner owns their home, the property’s market value goes up by 2%.
It is only an average, of course. Homes appreciate at different rates depending on their location and other factors. For example, homes located in areas with significant economic growth may appreciate faster than those where job opportunities are scarce. Places, where real estate is in high demand may also have a higher average appreciation rate than areas with less demand.
How much does a House Appreciate per Year?
According to Black Night’s report, the national house appreciation is 3.8% every year. It is not guaranteed, however. A house’s appreciation rate may be more or less depending on its location, market conditions, and other factors.
The annual changes in home values are also affected by the inflation rates in the country’s economy. If the inflation rate is 4% one year and the house appreciation rate is 3.8%, then that house’s market value will not go up but rather stay flat compared to the previous year.
If the depreciation rate were 5%, it would mean that homeowners are losing money every year because their homes are no more valuable than the previous year. Their expenses, such as property taxes and insurance, stay the same.
What can You do to Help a Property Value more Quickly?
A high house appreciation rate will help you achieve better financial goals, but how can you increase the property value of your home?
There are many different things you can do. But first, you need to find out if your property is entitled to any tax relief. If it is, that would be the number one thing that will help your house appreciate faster. Some other things you can do to improve the value of a property include:
- Enhance the property’s effectiveness.
- Make smart improvements.
- Increase the size of your property
1. Enhance the property’s effectiveness.
A property will increase in value when it is more effective. Enhance your home’s functionality by adding features like a second bathroom, bedroom, or dining room if you currently do not have one. You could even consider converting used space into an extra room for something else. For example, you could turn the basement into a playroom or den. You might also turn an office into a bedroom if the house is too small for two bathrooms.
Furthermore, you can improve the effectiveness of your property by installing solar panels. Installing solar panels will enhance the value of your house because it will reduce the amount of electricity you need to buy. You can also install energy-efficient appliances, and equip your home with water-saving faucets, tap fixtures, and soak bowls.
2. Make smart improvements
Another way to improve the value of your home is to make site-specific upgrades that raise the resale value of a property. It will help if you focus on high-impact renovations, such as those that will increase the home’s comfort level.
Such renovations include installing a swimming pool or an extra bathroom, converting a shed into a guest room, or building a porch or deck. In addition to increasing the property value, these changes may make your house more enjoyable and functional either now or when you decide to sell it. It will also improve the usability and functionality of a property and its overall market value.
3. Increase the size of your property
If you live in an area where houses are limited, there is a lot of demand for property. Consider purchasing land adjacent to yours and building more homes on it so that you can make use of the space properly. Otherwise, the area will go unused, and your property value will decrease because you do not have enough room compared to your neighbours.
If the neighbour’s land is for sale, you might be able to purchase more space at a lower price than the market value. You could then use the newly acquired land to build another house or garage. With this option, you are increasing the size of your property, which will increase the value of your home.