How to pick a realistic rate
Over long periods, house prices in most developed markets have grown at roughly the rate of inflation plus one to two percentage points, meaning nominal growth around 3 to 6%. Certain high-demand cities have exceeded that substantially, and plenty of regions have not matched it.
Beware extrapolating from a recent boom. Property moves in long cycles, and the decade after a sharp run-up has frequently been flat in real terms. Using a conservative rate protects you from building plans on a peak.
Nominal growth versus real gain
A property doubling over 15 years sounds impressive, but at 5% inflation money itself halves in value over roughly the same period. The real gain is much smaller than the headline number.
Also subtract the costs of ownership before calling appreciation profit: transaction taxes on both purchase and sale, agent fees, maintenance across the whole period, and mortgage interest if borrowed. Those routinely consume a large share of nominal appreciation on shorter holds.
Frequently asked questions
What appreciation rate should I assume?
Long-run averages in developed markets sit around 3 to 6% nominal. Check your specific city's long-term history rather than the last few years, which may not be representative.
Does property always go up?
No. Markets have fallen for extended periods, notably after 2008 in many countries, with some regions taking a decade to recover in nominal terms and longer in real terms.
Should I subtract inflation?
For understanding real wealth, yes. Nominal appreciation of 5% during 4% inflation is roughly a 1% real gain, which is far less than the headline suggests.
Does this include buying and selling costs?
No. Add transfer taxes, legal fees and agent commissions, which commonly total 5 to 10% of value across a purchase and sale, before treating appreciation as profit.
How does leverage affect my return?
A mortgage amplifies both gains and losses on your invested equity. A 5% rise on a property bought with 20% down is roughly a 25% gain on your capital, before interest costs, and the same maths works in reverse.
Is property a good inflation hedge?
Historically reasonable, since both rents and values tend to rise with prices over long periods. It is not reliable over short ones, where interest rates dominate.