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Property value double in 15 years..?
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Just to expand on a couple of things that HouseWorks and Cube have already mentioned:
1. What matters isn't so much how much the value of your investments has increased by, but how much your purchasing power has increased by. In other words you need to reverse out inflation. If an investment grows at the rate of inflation, then it isn't actually allowing you to purchase any more than you could previously. This is one of the main reasons why term deposits do not have a good reputation on this forum.
New Zealand introduced inflation controls in the late 80s. You will need to decide whether you think that impacts on house prices or not; assuming you do then you need to be careful of anyone who quotes historical prices without taking that into account. Based on my rough back of the envelope calculation, since 1990 housing has experienced compound annual growth of around 5.8% (housing index from 464 to 1900). That equates to house prices doubling about every 12 1/4 years.
2. The housing index is based on sale prices, so includes increases in value created by renovations, rebuilds etc. Obviously this means if you simply buy a house and hold onto it without improving it in any way then you shouldn't expect to experience growth at the same rate as the index (although obviously you might), but as far as I am aware there is no detailed analysis of the effect of those things on the index so it's difficult to estimate what your actual (average) growth might be.
And just as a general comment to close, I also find that looking forward in time when compound returns are involved often leads to conclusions that seem far fetched because the numbers are so large compared to what we are used to, even if they're in fact perfectly reasonable. If you told someone from Auckland in 1968 that the average price would be $832,713 in 2015 they would probably have a hard time believing it as well.
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Originally posted by HattrickNZ View Post
The amount of money on earth can absolutely keep doubling forever ....the number of people on earth can't
A quick example as to why most people need to understan maths a bit better.
A house is costs $500,000.....it sells 10 years later for $1,000,000......it's easy to say it's doubled in value....but not necessarily correct....the price has doubled for sure
If inflation has been running at 10% for those 10 years it would be correct to say it has dropped in value
If inflation has been only 2% during those 10 years it would be correct to say it has risen in value, but it would incorrect to say it has doubled in value
...and so on and so forth
Cheers
Spaceman
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Agreed with the various comments of Spaceman etc.
One thing that is of huge note is that New Zealand property prices have for the last long while increased at a pace significantly greater than inflation. Even ignoring the fact that buildings generally degrade over time, this implies there are other forces acting on our market to make them rise like this. As people mentioned, it's most likely growth in population and supply/demand movements.
In the long run, as the earth can't sustain increasing population forever, the supply/demand imbalance must eventually come to an equilibrium. At this point long-run price increases can't continue to outpace inflation. But they could technically keep doubling every ten years if inflation were to do the same; difference being that on average the price of everything else would be doubling too. Of course, this may be generations away.AAT Accounting Services - Property Specialist - [email protected]
Fixed price fees and quick knowledgeable service for property investors & traders!
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Population growth due to internal and international migration is a big factor driving house prices up in major cities with high living standards.
also the point about price vs inflation, how about looking at price or inflation vs value of mortgages? this is why investment in housing is a winner in most cases in the long run.
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Originally posted by Gary Lin View Post.....
also the point about price vs inflation, how about looking at price or inflation vs value of mortgages? this is why investment in housing is a winner in most cases in the long run.
Inflation is the friend of those with debt.....it eats away at the value/price of your debt, while adding to the value/price of you asset/house.
In theory with 5% inflation each year you're better off by 10%....ie you owe 5% less and own 5% more....without doing anything......In before anybody says.....I know of course it's not that simple
On the flipside there is of course the argument that inflation & interest are the work of the devil/reptilian-elite and will lead to the ruination and enslavement of all mankind
Cheers
Spaceman
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Originally posted by Gary Lin View Postalso the point about price vs inflation, how about looking at price or inflation vs value of mortgages? this is why investment in housing is a winner in most cases in the long run.
Not sure I understand that last bit.
Could you expand on what you mean?
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Yes, it sure does.
I would agree that if a property is cashflow positive then you probably only need it to match inflation (depending on your goals of course). Even a cashflow neutral property which only equals inflation probably fulfils goals for a reasonable number of people (overseas investors looking for asset protection being a good example).
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And because of the compounding effects of inflation you "feel" a lot richer quite quickly even if it's an illusion. Having a house go from 500K to a mil makes you feel good even if in reality the mil only has 500K of buying power. That's the emotive side of investment maybe :-)
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