To be clear, I understand what inflation is, but something that’s only keeping up with inflation doesn’t make sense to me as an *investment.* I can understand increasing value by actively doing something, like fixing the roof or adding an addition, but not by it just sitting there.
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You can’t make more land, so the land that the house sits on becomes worth more and more over time.
The house sitting on the land is less important, but it kinda comes with the land.
Supply and demand.
The amount of land in any given area is fixed. As populations grow, so does the number of people who want to live in a given neighborhood or in a given area. Economics 101 – when supply is static and demand is increasing, prices will go up.
Home values are largely an index of how badly people want to live in a neighborhood. They don’t always increase, just ask people who bought houses in 2021, but generally speaking if you’re in a good neighborhood in a good city there’s always people looking to get there. The more people want to live there, the faster houses are snapped up when they come available, the more your house is valued. If interest in your neighborhood cools, houses will sit longer, owners have to reduce the price to sell, and your value drops.
So locally you can see dips and spikes, but nationwide, our population is increasing, and therefore demand for housing is increasing. Supply isn’t increasing fast enough, so prices increase to make up the difference.
Supply and demand. Since the population tend of increase over time, the demand increase and the price go up.
Now in most industry, if the demand increase, it’s met with an increase of supply and the price are kept relatively in check. But in the case of home, there is several limiting aspect to the industry.
The land available is limited and how long it take between thinking of building a new home and the moment that home is ready to be sold. If you build cars, you already have a big factory so you can increase or decrease the production to match the demand. But for construction, each building is unique, a separate project with land bought, plan drawn, test needed for the soil, the legal paperwork, and coordinated dozen of companies to make the final product. The increase in supply will always lag behind the increase in demand.
If the population is shrinking, meaning less demand, house (land) price down.
If the population is growing, which it is, meaning more demand, house (land) price up
Housing is used as a hedge for pensions and investment funds. There is a vested interest in year on year gains. If the housing market collapses because it becomes unsustainable, it takes the banking industry with it. Eternal growth is the ideological standard of a cancer cell
Housing is an area where there is very little arbitrage. If cars are selling for a low price one place you can buy it there and drive it to where prices are high. That is not true for housing.
It used to be that developers could buy up large swaths of land near a city people wanted to live and build thousands of houses. That was made illegal in most places so supply can’t keep up with demand.
If the demand increases, then the land where the house sits becomes more valuable, and overall the house costs more (despite being older).
Notice that you may have the perception of houses always increasing in value, but there are a lot of places that lose value because demand decreases (industries relocating, etc). You don’t see these because typically there are no transactions connected to these houses: whoever owns a old house in a place of low demand just keeps living in it and passes it to their heirs. Sometimes they sell it at a loss. In contrast, houses in high-demand areas pass hands often.
A large part of the price of a home and its appreciation is the land/location. There are limited amounts of land within proximity to amenities people want — whether that’s commute time to jobs, ocean/mountains, good schools, etc. — and people are willing to pay more for access to those. As populations grow, travel times increase due to traffic, etc. the demand for the best increases, and the competition for the best real estate then sets benchmarks for all the less desirable real estate. If the homes on the ocean jump from $5m to $7m, then the homes a couple blocks away will similarly see appreciation somewhat inline.
And homes themselves are regularly maintained, so old homes with timeless types, modern updates will command more than dated homes. The charming 100 year old Tudor style will sell for top dollar if it has a modernized kitchen, perhaps for more than the similar sized new home lacking the same character. May also have benefits like more mature landscaping, larger trees, etc.
The population is growing. There are more people that are wanting homes because of this.
When there are more people wanting homes, but not as many new homes popping up, the value of homes increases.
You can probably buy a cheap home in a low population area still, but any city with a large metro population has no where to build more homes, but the desire to live there is of course growing with the population. So those housing prices go up a lot
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