How do interest rates affect property values?

Rising interest rates typically lead to decreased property values due to the impact they have on the affordability of borrowing for potential homebuyers. When interest rates increase, the cost of mortgages rises, meaning that prospective buyers face higher monthly payments for the same amount of borrowed money. This can reduce the pool of eligible buyers who can afford to purchase property, which in turn leads to decreased demand. As demand diminishes, property sellers may need to lower their asking prices to attract buyers, which ultimately results in a decline in property values.

Additionally, higher interest rates can also reduce the investment appeal of real estate, as alternative investments may become more attractive when they yield higher returns relative to the costs of financing. Overall, the dynamics of supply and demand in the housing market are closely tied to interest rates, making them a significant factor in determining property values.