I've always found the way people cheer on rising property values a little odd.
The basic things everybody needs are food clothing and shelter. How is it a good thing that something everybody needs should get more and more expensive? I think the relative amount I spend on food and clothing has dropped over the past 25 years, but my housing expenses have skyrocketed.
You're totally right. Rising property values are a bad thing. As a society we shouldn't be spending resources on arbitrarily defined lines on land. We should be using that money to do things like funding scientific research, or rebuild infrastructure, not making some landlord rich.
Cap rates don't take into account a property's appreciation, does it? If I own a building and the property value doubles but I don't increase my rents, my cap rate stays the same even though my wealth has increased a lot, right?
Cap rate is the net cashflow divided by the purchase price. In other words: the current cap rate is a function of the price you paid (ie : appreciation up until now)
Another investor will not buy for a higher price unless the rents also increased (ie: cap rate is in a certain acceptable range)
The statement "...property doubles in value but I don't increase my rents...." Is misleading since presumably no sane investor would pay double price for the same income stream. If the cap rate is 5% for a 1 million dollar property then it earns 50k per year. The property price that other investors are going to pay will be a function of a cap rate they are OK with ( which bakes in the price and earnings ratio). 2.5% cap rate means 2 million dollars still earning 50k year. No thank you
Additionally, the equity in an investment is not wealth... yet. It has to be sold to get money that can be used to put food on the table.
Rising real estate prices are not a good thing, but in this case they would be a sign of a good thing: the real estate has become more useful. We should distinguish between price increases due to building restrictions for example and price increases due to more efficient uses, better civic amenities, etc.
The basic things everybody needs are food clothing and shelter. How is it a good thing that something everybody needs should get more and more expensive? I think the relative amount I spend on food and clothing has dropped over the past 25 years, but my housing expenses have skyrocketed.