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How Did the Interest Rate Affect the Housing Prices - Dissertation Example

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In the paper “How Did the Interest Rate Affect the Housing Prices?” the author provides the example of the housing market and tries to understand what the impact of interest rates is over the housing market. In general perspective, the interest rates vary indirectly with housing prices…
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How Did the Interest Rate Affect the Housing Prices
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Download file to see previous pages Since interest rates affect the capital flows, the demand and the supply for capital and investors' required rates of ROI, interest rates drive property prices in a variety of ways. To understand how government-influenced interest rates, capital flows, and financing rates affect property values, one should have a basic understanding of the income approach to real estate values. Although real estate values are influenced by the supply and demand for properties in a given locale and the replacement cost of developing new properties, the income approach is the most common valuation technique for investors. The income approach provided by appraisers of commercial properties and by underwriters and investors of real estate-backed investments is very similar to the discounted cash flow analysis conducted on equity and bond investments
As for real estate, the changes in interbank lending rates either add or reduce the amount of capital available for investment. The amount of capital and the cost of capital affect demand, but also supply capital available for real estate purchases and development. For example, when capital availability is tight, providers of capital tend to lend less as a percentage of intrinsic value, or not as far up the "capital stack". This means that loans are done at lower loan to value ratios, thus reducing leveraged cash flows and property values
These changes in capital flows can also have a direct impact on the supply and demand dynamics for the property. The cost of capital and capital availability affect supply by providing additional capital for property development and also affect the population of potential purchasers chasing deals. These two factors work together to determine property values Discount rates: The impact of the rate of interests on housing price values can be seen in the derivation of discount or capitalization rates. The discount rate equals an investor's total return requirements while capitalization rate can be viewed as an investor's required dividend rate. ...Download file to see next pagesRead More
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