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Real Value Growth is Far Different From Nominal One

real value growthIn an article for the website Property Update, Cameron Kusher writes that in purely ‘nominal’ terms, home values have risen by 9.3% leading up to September 2014. In ‘real’, inflation-adjusted terms, this growth has been 6.8%. Inflation is quite an integral part of the discussion. Let us find out a little about this significant aspect.

Gulf of difference between nominal and real value growth

If you look at it ‘nominally’, home values did not fall between September 1998 and December 2008. This is largely because the fall in values was compensated for by rise in wages. Examined in real terms, the values did drop considerably.

Inflation-adjusted figure presents a different picture

The combined capital cities data reveals an escalation is nominal property values over the last year, 5 years, 10 years and 15 years. This increase has been 9.3%, 3.8%, 4.7% and 7.4% respectively. In real terms this growth has been a lot more moderate, assuming figures like 6.8% for the past year, 1.2% for the past 5 years, 1.9% for the last decade and 4.3% for the last 15 years.

Post-GFC stats

Since the Global Financial Crisis, the nominal value of properties has sprung by 34% across capital cities (combined). Of this, Sydney with 51.2% and Melbourne with 44.9% have been the keenest contributors. If you relate this figure with real value growth, you will come to a much more modest 16.5% across capital cities (combined) since GFC.

You can read the original article here.

It is not easy to fathom why we could buy a mansion in 1920 with our modest salaries today. Since the 1920s, the cost of living has come up many folds. Substantial income growth has been witnessed and there is no shying away from inflation either. What this means is that if we choose to ignore real value growth and stick to the nominal growth instead, we will always get a skewed figure.

How much importance do you think economies should pay to inflation?