Term Of The Day: Appreciation

Appreciation is the rise in the value of an asset over time.

PropTiger Explains Appreciation

In real estate, appreciation is the increase in the value of a real estate asset because of market fluctuations, inflation, government policy or any other factor. The price of real estate assets appreciate because of a wide variety of reasons. Prices will appreciate if the demand rises relative to supply. But, if the supply rises relative to demand, even if there is an increase in demand, residential property prices will depreciate. Depreciation is the decrease in the value of a real estate asset over time. When we say that the price of a home appreciated by 10% annually, it means that the average rise in the price of the home per year was 10% of its price when it was bought.

A high inflation rate would also lead to an appreciation the nominal value of real estate assets. Fluctuation in interest rates have a remarkable influence over price appreciation in real estate markets.

Real estate investors and analysts consider land an appreciating asset. Physical structures like buildings are considered depreciating assets. The location in which you buy property is seen as the single biggest factor influencing price appreciation because the value of land appreciates when the markets in a locality develop and grow. The value of land also appreciates when government initiates policy measures make a neighbourhood pleasant to live in. If the government builds a highway, bridge or a metro line, property prices in the area would rise.

In India, capital appreciation rates are in the range of 8-9%. This is relatively high by global standards. But, this is not the only factor real estate investors take into account while buying property. Rental yield is another. In India, rental yield is 2.39%, according to the organizers of Philippine Property and Investment Exhibition (PPIE). This is very low, by global standards.

Check out PropGuide's comprehensive guide to real estate terms here.

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