Why Does Real Estate Keep Getting More Expensive? Understanding the Market

Do you sometimes wonder how it is that, despite crises, turmoil and constant complaints about the high cost of living, flats cost more and more year after year? Many young and ambitious people put off the decision to buy, hopefully watching for a great market crash. They’re counting on some mythical bubble finally bursting and their dream home suddenly becoming cheaper than ever before. But as the seasons go by, it turns out that the dream property has once again slipped beyond their financial reach. This gives rise, in buyers’ minds, to a very important question about why real estate gets more expensive so relentlessly over the years.

The answer to this question doesn’t lie at all in dark conspiracies of wealthy developers or in the secret dealings of high finance. Over the long term, house and flat prices rise because several very hard market laws are at work here. Of course, this market also has its moments of respite, months of stagnation or even local price drops when the whole economy briefly runs out of breath. But looking at it from the distance of a decade or two, it’s clear that concrete, brick and land have a natural tendency to gain in value. This phenomenon doesn’t, by the way, concern only our own backyard — it’s a long-term trend visible across almost all of Europe.

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Money loses its power — the main reason real estate gets more expensive

We have to start with a basic truth about the money you carry in your wallet or keep in your savings account at the bank. With each passing year, your cash loses its purchasing power, which is a natural effect of inflation and protracted economic processes. Once, a certain sum could buy a huge weekly shop, and today the same amount is enough for just a few basic products. Exactly the same mechanism affects the construction industry, making real assets valued much higher in nominal terms after years. So if you’re looking for a logical reason why you have to pay more per square metre every year, you simply have to look at what’s happening to the purchasing power of your paycheck.

There’s absolutely no justification for flats to keep a constant price while everything around them becomes more expensive. Year after year, the prices of electricity go up — and electricity is, after all, essential for erecting buildings and producing the necessary materials. Concrete, steel, timber and everyday human labour also become much more expensive, because skilled workers want to earn more and more too. When we add the steadily rising prices of building land to this, we get a ready recipe for every new block of flats costing a developer much more than just a few years ago. All of this translates directly and very strongly into the final price you have to face at the sales office.

A flat is much more than just a safe roof over your head

For many people, buying their own flat is simply meeting a basic life need: having their own place to sleep and rest every day. It’s worth remembering, however, that this market also attracts people who look at concrete walls as a large and safe vault for their money. People with financial surpluses buy properties in order to protect their hard-earned savings from an irreversible loss of value. Others, in turn, treat such purchases as an excellent way to build themselves an additional, entirely passive source of income through renting. In this way, an ordinary flat becomes a kind of storehouse of capital that can work hard for its owner.

The presence of investors on the market very strongly props up the general valuations of buildings in almost every larger, developing city. When rents go up, it’s much easier for people placing their capital there to accept higher purchase prices from a developer. The calculation here is extremely simple and brutally market-driven: as long as a property generates a solid rental yield, paying a high amount for it makes enormous sense from a business point of view. This drives general demand and means there are still buyers appearing on the market who are ready to pay rates that seem prohibitive to the average person. It’s precisely in such cold calculations that another extremely important component of the market puzzle — and the answer to the question of why real estate gets more expensive — lies.

You simply can’t artificially print more of a good location

Every experienced investor will tell you that in this industry only three things really matter, and all of them come down to a brilliant location. You can put up infinitely many new buildings on the outskirts, but attractive plots in the centre of a vibrant city aren’t growing in number at all. You can’t magically multiply well-connected districts or clone charming neighbourhoods with the best schools and extensive green spaces. Land in such sought-after places is an absolutely scarce good and, with each year, becomes an increasingly luxurious and extremely scarce commodity. By nature, people will always want to live where they’re close to well-paid work, developed infrastructure and everyday big-city convenience.

This constant rush of people towards cities and good districts is an extraordinarily powerful engine driving the valuations of the most interesting apartments on the market. Competition for those few, perfectly located properties is enormous, which inevitably means their prices usually rise much faster than the ordinary market average. Even if hundreds of cheap properties are built in the suburbs, those with a view of the very centre will always hold their exceptionally high value. When the available stock is physically limited and the number of people eager to acquire it keeps growing, the simplest maths must push the rates decisively upwards. Understanding this elementary mechanism of supply and demand explains why the most desirable spots on the map never get as cheap as we’d expect.

This market behaves like a heavy tanker on the ocean

Many beginner observers make a fatal mistake, comparing the housing market to the stock exchange, where everything changes in a fraction of a second. The market of bricks and mortar works on completely different principles, resembling in its slow behaviour a mighty tanker on the ocean rather than a nimble motorboat. Changing course on this market takes a very long time, and any prices are extremely resistant to sudden downward movements. Even if demand suddenly drops drastically, sellers usually don’t panic and simply prefer to hold off on selling patiently. Instead of selling their assets for next to nothing, they take the offers down from popular portals and calmly wait for better economic times to return.

Development companies follow a very similar, conservative pattern, protecting the profits they’ve made and the valuations of their already-completed projects. When they see that the number of people interested in new properties is clearly falling, they immediately put the brakes on further investments and halt the construction of planned housing estates. This means a noticeable shortage fairly quickly appears in the supply, which, the moment the situation improves, hits disoriented buyers again. The market makes up any losses very quickly and returns to its long-term upward trend, destroying the hopes of those who put off the decision for years. It’s precisely this chronic reluctance of sellers to lower prices that is a powerful brake on any larger and more lasting crashes in this industry.

Loans and borrowed money are powerful market fuel

We can’t honestly talk about market trends while leaving out the most important factor that gives many people a real chance to buy their own roof over their heads. This isn’t a market where all transactions take place purely in hard cash pulled out of socks or thick investment wallets. This whole mighty industry is strongly supported by borrowed money, which means prices are inseparably tied to the availability of external financing from banks. When the procedures are simple and the instalments relatively low, a huge wave of new, extremely determined buyers suddenly pours onto the market. These people quickly start competing with one another for the same resources, which leads in a straight line to the rapid bidding up of prices by sellers rubbing their hands.

This well-known mechanism works in practice like pouring high-octane petrol onto an already solidly burning fire. When any easing of access to capital appears, for example through external support programs, demand outstrips construction capacity within moments. More people with a fatter — though entirely borrowed — wallet can afford to sign the notarial deed and collect the keys to their dream home. The whole sector immediately adjusts its price lists to this new market reality, which is very optimistic for developers. As long as money from financial institutions is fairly easily available to a broad group of people, strong pressure for market valuations to rise will certainly persist.

But don’t be fooled — not every building is a gold mine

After reading all the arguments above, one might rather rashly conclude that buying any four walls is an absolute guarantee of financial success. It has to be stressed very clearly and loudly, however, that the general rise of the whole market does not at all mean that every single address is an excellent investment. Buying a run-down studio flat in a provincial town that young people are leaving en masse and for good can turn out to be an extremely painful trap for your capital. The situation looks equally grim in the case of buildings in a dreadful technical state or properties located in areas with no chance of development whatsoever. Such places may appreciate at a pace much slower than the market average, and in extreme cases may even irreversibly lose their real value.

Every aware person must always remember the golden rule of the world of finance, which says that a nominal rise in price is not the same as an actual profit. If your average flat gained in value over the year, but the real cost of living soared much more, then in fact you’re worse off. That’s why it’s so terribly important never to give in blindly to market euphoria and to calculate each next move very coolly, calculator in hand. General knowledge of exactly what pushes prices up is a powerful analytical tool, but you have to know how to use it with a great deal of humility. Properly managing your own savings requires constant selection and searching the market only for the kind of gems that will actually stand the test of time.

Understanding the hard rules of the game is your first step to success

The long-term rise in house and flat prices is not some momentary anomaly, a system error or an illegal conspiracy of greedy entrepreneurs. It’s a completely normal, healthy and predictable effect of a complex machine whose cogs are inflationary processes, changing demographics and the policy of financial institutions. In this field, we’re dealing with a collision of several powerful phenomena: money slowly losing value, society’s rising incomes and the lack of free land. On top of all this comes the constantly rising cost of construction itself and the fact that, for wealthy people, real estate is an excellent, multi-generational shield against inflation. If all these powerful market forces act on investors at the same time, there can essentially be only one direction for the charts.

The biggest problem these days isn’t at all the objective fact that rates per square metre go up systematically and mercilessly. The real tragedy is that, for many young and hard-working people, these rises are much faster than the building of their own financial security. That’s why it’s so crucial to constantly broaden your economic knowledge, understand the processes around us and not wait for miraculous price cuts that will never come. If you correctly understand the rules of this great and never-ending market game, it will be much easier for you to make accurate and safe decisions. In the end, it’s your hard-earned money and your future, so take full, one-hundred-percent responsibility for it starting today.