Key Investment Tools: Nominal Prices vs. Real Prices

15th October, 2015
  • A nominal price is the historical amount that an item was rented for or purchased for at a given time. In comparison, real prices represent the price of a piece of real estate when adjusted for factors such as inflation.

    It is important to take the real value of a piece of real estate into account when assessing its value over time, to ascertain whether it actually increased or decreased in value.

    The reason for this is because the purchasing value of money can fluctuate over a given time, and the nominal value does not always accurately represent the real value of a piece of real estate for that period when compared to another time or the present.

    A house that was worth $100,000 10 years ago and that has a current price of $100,000 may have the same nominal price, but when inflation is taken into account, it has actually decreased in value in terms of its real price.

    Likewise, if that house is currently on the market at $120,000, it may appear as if the value of the home has increased, whereas the increase in value in terms of real price may in fact be negligible.

    As an investor, the real price of a piece of property is typically a much more important measure than the nominal value of a piece of property. This is because you will be holding the piece of property for a period, and the nominal price does not accurately represent that property’s value, making it difficult to determine whether or not something is a good investment.

    By assessing the real value of a piece of property (or its value as a buy-to-let property) you can more accurately determine whether it is a good investment, and can assess whether or not it can be expected to increase in value over time.


    by: Prime Asset Investments

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