Reasons Why Real Estate Increases in Value.

by Qarah Ict Qarah ICT

Real estate is likely the most significant investment in every family's global portfolio. Most average families invest the maximum amount of money in their residential homes. This belief has been reinforced by fact that houses have exponentially risen in value in most parts of the world. Stories of many appreciations over a period of 50 years are not uncommon. However, it is essential to observe that this is nowhere near an extraordinary rate of return. Even if a property has appreciated 100 times in 30 years, its annual growth rate is less than 10%! A lack of literacy about the magical effects of compounding makes people blindly chase real estate.

The critical point is that people look at historical data about real estate and expect the trend to continue. This means that they expect that property prices will increase again over the next 50 years by a multiple of 100. This may be correct, depending upon the particular location.

This article will examine the underlying factors driving real estate growth.

1: Zoning Laws

One of the primary reasons for a change in price in the real estate sector is the change in land zoning. For example, 50 years ago, the population was not as much as it is currently. Hence, much land was considered for the use of agriculture. Agricultural land does not have much commercial worth. Therefore the prices of these lands were lower.

As a result, when zoning laws change and the land is allowed to be used for commercial and residential purposes, the value of the land increases. Much appreciation over the past 50 years has been due to changes in zoning laws.

2: Infrastructure Development

If commercial and residential construction is allowed on a particular plot of land, then infrastructure development must begin accordingly. New roads have to be developed. Also, livability increases when nearby markets, hospitals, and schools are built. Infrastructure development takes an extended period. This level may last for close to a decade. However, if changes are continually visible, then the price of land will keep on rising

3: Network Externalities

Once a location becomes famous with residents, it becomes a breeding ground for many social activities. Restaurants, Hobby classes, multiplexes, shopping malls, etc., start functioning in that area. This suits the way of living of many people, and properties in this residential market start dealings at a premium. The more advanced a location becomes, the more people want to live in it, and prices continue to increase.

4: General Inflation

Finally, properties become costly to advance each year. This is because the cost of inputs like steel, cement, and skilled labor tends to rise yearly. For this reason, general inflation makes properties more costly. If the nominal cost of the property is not growing by 2% to 3% every year, the homeowner is losing money in actual terms. This is because inflation is rising, whereas the cost of the properties is not!

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