Understanding Nominal Versus Real Property Value Growth

a BORROW SMART MONEY CONCEPT
Understanding Nominal Versus Real Property Value Growth

Nominal growth and real growth are two concepts used to measure the increase in real estate values over time. They represent different aspects of value appreciation and account for factors such as inflation.

Breaking Down Nominal Versus Real Property Value Growth

1. Nominal Growth: Nominal growth refers to the increase in real estate values without adjusting for inflation. It represents the absolute change in the market price of a property over a specific period. For example, if a property's value increased from $200,000 to $250,000 over five years, the nominal growth would be $50,000.

2. Real Growth: Real growth, on the other hand, takes into account the effects of inflation on property values. It adjusts the nominal growth figure to reflect the purchasing power of the increased value. Real growth provides a more accurate assessment of the property's appreciation by removing the impact of inflation. It represents the change in the property's value in constant, inflation-adjusted dollars.

Here's an example: Suppose the inflation rate over the five-year period was 10% in total. To calculate the real growth, you would subtract the inflation-adjusted amount from the nominal growth. In this case, if the nominal growth was $50,000 and the inflation-adjusted amount is 10% of $200,000 ($20,000), the real growth would be $30,000 ($50,000 - $20,000).

By considering both nominal and real growth, you can gain a more accurate understanding of how the value of real estate has changed over time. Nominal growth provides a simple measure of the absolute increase in property value, while real growth adjusts for inflation to give a clearer picture of the property's appreciation in terms of purchasing power.

Mortgage Advisor Tip: The practical application of this is realizing you house has gone up in value, a lot, but if you sell it you would have to buy a house that has also gone up, so your 'real' growth is nonexistent if all property is going up. The benefit can happen if you relocate - say in Seattle you sell a house for $3,000,000, but buy a new house in Durham for $1,000,000, then you have changed currencies as all real estate is local - you have a new valuation in a new economy.