What is INFLATION and how does that relate to Appreciation. When you listen to today’s show you will learn what the difference is and why it matters to you (and you clients). Today’s podcast features an article that will help you understand the difference.
Appreciation vs. Inflation
Appreciation is when the true intrinsic value of something increases. Notice I didn’t say when the “price” or “cost” of it increases; rather the value increases. Appreciation is when something becomes more valuable, more desirable, more useful. Here are a few examples of how your property could truly appreciate:
You live in a town that is immensely more desirable than it was when you bought the property, and many people are moving to town (increased demand for the same supply) you struck oil in your backyard.
A major employer announced it was building a facility two miles from your house, that will employ 5,000 people (who will need a nearby house to live in).
In these cases, regardless of what the market or greater economy is doing, your property is now in higher demand than it used to be–making it appreciate. Appreciation is a reflection of a change in the actual asset itself.
Inflation, on the other hand, can look a lot like appreciation…while not being true appreciation. Inflation is when the number of dollars one has to exchange in order to buy your property goes up. Sounds like ‘appreciation,’ right? But it’s not. You see, inflation is NOT a reflection of a change in the asset itself; rather, inflation is a reflection of the decreasing purchasing power of the currency you exchange for that asset. In other words, the asset isn’t necessarily worth more; it’s just that the dollars you have don’t have as much purchasing power as they used to, so you have to give up more of them if you want to trade for something.