What is appreciation or depreciation of property?

Whether you’re an investor or first home buyer, the value of your property is a fundamental component of home ownership. The fluctuation of the value of your property is typically described as appreciation or depreciation.

What is appreciation of a property?

Property appreciation refers to the increase in value of a property over time. If a property ‘appreciates’ in value, this means that its value has increased since you purchased it. For example, if you purchased a home at $500,000, and over 5 years this value increased to $575,000, this would mean its value appreciated over time.

For homeowners, this is generally considered a good thing, as an increase in value may represent a greater return on investment, and more equity for home loan customers. You may find that you earn a profit when you sell the home, or you could dip into this equity if needed, if your home has appreciated in value. 

What is depreciation of a property?

Property depreciation, as the name suggests, describes a decrease to the value of a property over time. If a property’s value were to depreciate, this would refer to its value falling from the price it was when you purchased it. 

Understandably, this scenario can cause financial stress and be risky for buyers looking to gain a return on their investment, or home loan borrowers trying to access equity in the home and/or refinance. For some, it may put them at risk of being in negative equity, in which the value of the property falls below the balance of the mortgage. 

What factors affect appreciation and depreciation of a property?

There are a range of factors that can impact the price of a property – many of which can be out of your control. Some of the most common include:

• Interest rates

The home loan interest rate environment can affect the value of property. If interest rates are on the rise, this can decrease demand due to buyers being priced out, which may lower property values in tandem. If buyers aren’t arriving in the same numbers to snatch up property, sellers may have to decrease prices to attract them in.

In a falling rate environment, this may have the opposite effect as debt is considered “cheaper”, and meeting mortgage repayments may be more accessible, which in turn increases demand.

• Housing market

Speaking of supply and demand, the housing market itself can affect whether your property appreciates or depreciates in value. In a sellers’ market, it’s likely that home appreciation will increase. Whereas in a buyers’ market, home values may depreciate. Further, if there is a glut of properties available, values may decrease as a response. If there is limited supply of properties, prices may rise as a result.

• Location

The location of the property can affect its value over time significantly. This can refer to any number of positive and negative factors, such as improved public transport, green spaces, new amenities, and access to good schools, as well as major infrastructure projects. 

For example, if you purchased a home and several years down the track a new motorway was constructed next to the home, it is likely this project and its results could depreciate the value of the home, due to the potential noise and pollution.

• Renovation and improvements

Any improvements made to a property could work to assist in increasing its selling price, and ensuring the home appreciates in value. 

Any number of improvements may help to do this, including updating the kitchen and bathrooms, adding an additional storey or granny flat, improving its curb side appeal and more. Nowadays, homeowners are looking at increasing the energy efficiency of a property as a main strategy to boost its value.

Home improvements are arguably the only factor homeowners can control to help boost their property’s value.

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