Real Estate can and does appreciate. And prices can drift downwards too. I would classify the factors that decide on these movements as being:
1) Local (Distance from central business district, prevailing living conditions in that area including offices, shopping malls, parks, entertainment centers, distance from major arterial roads, distance from landmarks such as airports, town halls etc.)
2) Regional or National (Growth rate of a country, Rate of unemployment, Rise in income levels, Rise in populations segment that can afford housing, raw construction material prices etc.)
3) International (Net increase/decrease in foreign capital investments in the country by the rest of the world)
4) Emotional/Intrinsic (Some have argued that houses are relatively more important to people and they are willing to spend a lot more on living in a better accommodation. The hypothesis being that with greater amount of time being spent in office and consequentially lesser time available to spend with their families, people prefer to have all the luxuries at easy reach within the house rather than having to go outside.)
(I am discounting for a moment the increase in prices due to *hype* created around a specific property, be it a condo overlooking a golf course, a waterfront community villas or a plush ultra-lux tower coming up in the middle of a central business area)
In the last 7 and a half year, starting right after the dot com bust, real estate prices across the globe have been on steroids. Where ever you went Australia, UK, India, China, Russia or United States included, prices were rising as if the human race was running out of space on the planet! Even accepting the fact that real estate oftentimes has a cycle, some say 5 years, in which it’ll rise and then either stay level or decrease slightly for the next 5, but the last 7+ years have seen nothing short of sheer madness.
On a local or regional scale, real estate can boom, and importantly, sustain for a longer duration, say in an economy like China or India growing at 10% per year assisted with heavy overseas investments. But across the globe, in my opinion, real estate prices can only rise on a sustained basis IF there is a general increase in affordability (individual’s income vis-à-vis the cost to acquire a house). And that can come only through an increase in efficiency in production of goods or services, sustained over a period of time – same number of people producing much higher level of output at an even lower cost per unit. That’s when you truly have a rise in income that outstrips the cost of living. And what do you do with the excess funds – you consume more, more cars, more hamburgers and importantly more houses. In this scenario, the things that can not be produced in large quantities overnight (good real estate, diamonds, gold, champagne) will appreciate.
However we can not having an measurable increase in efficiency everyday – I would say that leaving aside incremental developments every now and then, a truly revolutionary increase taken place once in a few decades – for example the discover of fire, invention of the wheel, bow and arrow, domestication of horse and animals, cultivation, gunpowder, the printing press, the external/internal combustion engines, the integrated chip, internet etc.
The last few years have seen real estate skyrocket without any major productivity gains, apart from the emergence of the internet. That alone I would say, can not justify the doubling or quadrupling of real estate valuations across the globe for each of the past 7 odd years. Sanity has to prevail – and looks like…..it is.