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The frenetic real estate market of the past two years has been difficult for many buyers, but for those who have been able to buy, the return on investment has been solid. Homes are appreciating at a record pace, with sales prices rising about 20% between 2020 and 2021.
With these rapid increases in home values, some investors are looking to rental properties as a source of potential returns. While many of those capitalizing on the current state of the market are institutional investors, current market conditions could also present opportunities for retail investors. However, these potential owners need to assess how rapid changes in real estate values might affect their short and long-term investments.
Rising house prices have been a major story since the start of the pandemic, but house prices have shown good volatility over time, especially relative to rent. For example, prices rose at a fairly rapid rate during the housing bubble of the early to mid-2000s, but crashed when the bubble burst. House prices then saw an uneven recovery until the recent peak from 2020. For rents, meanwhile, the year-on-year growth rate remained stable between around 2 and 5% in out of a dip during the Great Recession and over the past year or more.
The relative stability of rents compared to the current rise in house prices will affect how potential real estate investors value properties. As sales prices increase, initial investment and ongoing costs also increase, which can limit investment cash flow if rents do not keep pace. On the other hand, a rapid appreciation in home values can increase the investor’s overall return when the property is eventually sold.