Appreciation occurs when an asset or investment increases in value. Real estate is a common example of an appreciable asset for which considerable data is available. If you already know the average appreciation rate, you can estimate an asset's future value using its current value. Likewise, if you know the past and present values of an asset, you can calculate its average appreciation. This will help you determine whether a particular purchase, such as a car or home, is one that will pay off.
You can calculate appreciation by assessing the appreciation rate of an asset and then using that information to plot its future value over time.
Calculation of Appreciated Value
To calculate the appreciated value, first add 1 to the appreciation rate, expressed as a decimal. As an example, for an 8 percent annual appreciation rate, add 1 to 0.08 to get 1.08.
Raise the result to the nth value, where "n" is the number of projected years. In the example, to calculate the appreciated value five years in the future, raise 1.08 to the fifth power -- multiply 1.08 by itself five times. The result for this example is 1.47.
Multiply this figure by the current value of the asset to calculate its appreciated value. Continuing with the example, multiply the current $150,000 value by 1.47 to calculate its appreciated value of $220,500. This would be the value of the asset after five years of appreciation at 8 percent a year.
Calculate Average Appreciation Rate
Divide the current value by the past value. Continuing with the example, if your house is now worth $220,500, divide $220,500 by the original $150,000 value to calculate a factor of 1.47. The house is now worth 1.47 times as much as it was worth five years ago.
Take the nth-root of the result, where "n" is the number of years between the two appraisals. In the example, taking the fifth root of 1.47 leaves you with an average annual factor of 1.08.
Subtract 1 from the result to calculate the appreciation rate in decimal format. In the example, 1 minus 1.08 calculates the average appreciate rate of 0.08, or 8 percent. Your house's value has gone up 8 percent a year for five years.
Estimating Market Appreciation Rates
You can estimate market appreciation rates the same way, but using the average value during a certain time period. As an example, if the average sale price for houses during the first quarter of 2015 was $100,000 and the average during the first quarter of 2018 was $126,000, the appreciated rate would again be 8 percent ((126,000 / 100,000) ^ 1/3 - 1).
- You can estimate market appreciation rates the same way, but using the average value during a certain time period. As an example, if the average sale price for houses during the first quarter of 2010 was $100,000 and the average during the first quarter of 2013 was $126,000, the appreciated rate would again be 8 percent ((126,000 / 100,000) ^ 1/3 - 1).