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I thought we were talking about rent levels not home prices! Again how does low rates drive up rents? Keep in mind that very few people borrow to pay rent whil

by spikels 10y ago

I thought we were talking about rent levels not home prices! Again how does low rates drive up rents? Keep in mind that very few people borrow to pay rent while most apartments and their construction is financed by debt. At first approximation low rates would be neutral for demand but positive for supply.

yowlingcat 10y ago
You might be conflating overall rental demand activity with overall real estate financing activity. Keep in mind that low interest rates create continuous opportunities for financing, bandlimited to the minimal interval between credit knocks for doing so. If Joe Q. Landlord can refinance or purchase property at an assumed valuation of $X, that incorporates an expected inflation subject to interest rate Z%, which yields a median monthly rental fee of $Y.
- spikels 10y ago
  Not sure I am following you but the classic valuation relationship would be something of the form $X is proportional to $Y/Z% (i.e. revenue or income capitalization valuation). So if $X is fixed (your assumption) and Z% decreases (interest rates decline) then $Y (rents) must also decrease. QED
  - yowlingcat 10y ago
    Wouldn't say that $X is not proportional to $Y/Z%. It's the other way around, that $Y is proportional to $X/Z%. If Z% decreases, that value increases. The utility of a property can serve multiple use cases -- it could be rented, lived in, or used for parking wealth. Financing allows people to purchase property at rates higher than they would be able to with all cash. That specific rate is material to the deal they get on their mortgage at the time that they finance it. Therefore, low interest rates inflate the prices of real estate because they encourage people to take on debt because it's at more favorable terms. They also encourage people who have mortgages on worse terms to refinance. With higher interest rates, the ratio of mortgage to all cash buyers would decrease, and so the appraised market value of the property would decrease as well.
conanbatt 10y ago
Rent prices and house prices are linked. The more houses people buy to live in, the supply for houses for rent lowers. People that had property renting out see a higher return by just selling their property, reducing the supply for the rental market. How strong is that correlation, i don't know. There could be other demographic factors like people moving to cities more and more (SF still has a huge influx of people).
- collyw 10y ago
  "The more houses people buy to live in, the supply for houses for rent lowers." Surely the demand for rental properties lowers by the same amount when someone buys a house.

by spikels 10y ago

yowlingcat 10y ago

You might be conflating overall rental demand activity with overall real estate financing activity. Keep in mind that low interest rates create continuous opportunities for financing, bandlimited to the minimal interval between credit knocks for doing so. If Joe Q. Landlord can refinance or purchase property at an assumed valuation of $X, that incorporates an expected inflation subject to interest rate Z%, which yields a median monthly rental fee of $Y.

spikels 10y ago
Not sure I am following you but the classic valuation relationship would be something of the form $X is proportional to $Y/Z% (i.e. revenue or income capitalization valuation). So if $X is fixed (your assumption) and Z% decreases (interest rates decline) then $Y (rents) must also decrease. QED
- yowlingcat 10y ago
  Wouldn't say that $X is not proportional to $Y/Z%. It's the other way around, that $Y is proportional to $X/Z%. If Z% decreases, that value increases. The utility of a property can serve multiple use cases -- it could be rented, lived in, or used for parking wealth. Financing allows people to purchase property at rates higher than they would be able to with all cash. That specific rate is material to the deal they get on their mortgage at the time that they finance it. Therefore, low interest rates inflate the prices of real estate because they encourage people to take on debt because it's at more favorable terms. They also encourage people who have mortgages on worse terms to refinance. With higher interest rates, the ratio of mortgage to all cash buyers would decrease, and so the appraised market value of the property would decrease as well.

conanbatt 10y ago

Rent prices and house prices are linked. The more houses people buy to live in, the supply for houses for rent lowers. People that had property renting out see a higher return by just selling their property, reducing the supply for the rental market. How strong is that correlation, i don't know. There could be other demographic factors like people moving to cities more and more (SF still has a huge influx of people).

collyw 10y ago
"The more houses people buy to live in, the supply for houses for rent lowers." Surely the demand for rental properties lowers by the same amount when someone buys a house.