Question

Which of the following is not correct about residential investment?

• A. It depends on the net real return obtained by owning housing.
• B. The combination of high nominal interest rates and high inflation strongly encourages housing investment.
• C. The demand for housing is insensitive to the nominal interest rate.
• D. The cost of owning a house rises almost proportionately with the real interest rate.

Hint:

Housing demand is highly sensitive to interest rates, as higher rates make mortgages more expensive.

Answer 1

The Correct Option is C

Step 1: Understanding residential investment.
Residential investment is affected by factors such as real return, interest rates, inflation, and the cost of ownership.

Step 2: Analysis of options.
- (A) It depends on the net real return obtained by owning housing: This is correct. Residential investment depends on the net return from owning a house, considering factors such as rental income and price appreciation.
- (B) The combination of high nominal interest rates and high inflation strongly encourages housing investment: This is incorrect. High nominal interest rates typically discourage housing investment by increasing borrowing costs.
- (C) The demand for housing is insensitive to the nominal interest rate: This is incorrect. The demand for housing is highly sensitive to nominal interest rates because higher rates increase borrowing costs.
- (D) The cost of owning a house rises almost proportionately with the real interest rate: This is correct. As real interest rates increase, the cost of owning a house (through mortgage payments) also rises.

Step 3: Conclusion.
The incorrect statement is (C) because housing demand is indeed sensitive to interest rates.