The most significant investment in any family’s portfolio is their residential property. The majority of middle-class families invest their maximum money into their homes. The exponential rise of house values reinforces this belief in many places. Tales of 100-fold appreciation in 50 years are not unusual. It is important to remember that this is a moderately high rate of return. Even if the Value of a property doubles in 50 years, its annual growth rate still needs to be 10%. The lack of knowledge about compounding’s magical effects makes people chase real estate blindly.
It is important to note that when people examine historical data on real estate, they expect this trend to continue. They expect the property price to increase 100 times over the next fifty years. It may or may be true, depending on the location.
Factor 1: Zoning laws
The zoning system is one of the main reasons why prices in real estate change. In 50 years, for example, the city’s population was much lower than it is now. A lot of land had been set aside for agricultural purposes. Land used for agriculture has a lower commercial value. These lands had lower prices.
Land value increases when zoning laws are changed, and land can be used for residential and commercial purposes. The changes in zoning law have been responsible for a lot of appreciation over the last 50 years. This is especially true for the areas adjacent to megacities. As cities grow, agricultural land adjacent to them tends to gain Value. Many towns have expanded far too much. In the future, it is unlikely they will experience more growth. What has happened over the last 50 years is unlikely to be repeated within the next 50.
Factor 2: Infrastructure Development
To allow residential and commercial development on a particular plot of land, infrastructure development must also begin in accordance. It is necessary to build new roads. The livability of a place increases when nearby markets, schools, and hospitals are built. Infrastructure development can take a long time. This phase may last close to a decade. If changes are visible continuously, the land price will continue to rise.
Factor 3: Connectivity in the Workplace
The commute should be shorter for many people. The time spent commuting is not compensated. The commute does, however, waste valuable time during the day. As a consequence, millennials choose to stay closer to their place of work. If a location is near the workplace, then it will command a higher price. In some cities, relocating the central business district to the outskirts has increased prices in these areas.
Nevertheless, people no longer buy undeveloped plots of land. They prefer to purchase properties that have been developed. Developers pocket a large portion of the appreciation due to the proximity of their offices. In many cases, the price of the apartment is based on the likely future developments. Individual investors need more to gain by increasing connectivity.
Factor 4: Network Externalities
As a place becomes popular among residents, many social activities are organized there. Hobby classes, restaurants, shopping malls, theaters, etc. In that area, businesses start to operate. Many people find this lifestyle appealing, and the prices of properties on the residential market begin to rise. As a place develops, more people will want to live there, and the prices will continue to increase.
Factor #5 – General Inflation
The cost of developing properties increases every year. This is because the cost of inputs such as cement, steel, and skilled labor tends to rise yearly. Inflation makes the property more expensive. Actual money loss occurs when the nominal Value of a property does not increase by 2%-3% per year. The inflation rate is rising, but the prices of properties are not.