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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 capitaliza
by 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 agoWouldn'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.