Problem Statement

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Interest Rates Changes and Property Ownership
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RENJU PETER

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Changes in Interest Rates and the Influence on Renting and Buying Properties

Sociology Concepts and their Applications

Different sociological concepts deal with the understanding of human behavior

and the whole society. It is applied to understanding social and human cognition. The

unit of sociology analysis ranges from the individual level to a large group of persons.

Sociology is divided into structural functionalism, conflict perspective, and symbolic

interactionism (Johnson, 2022).

According to structural functionalism, society is viewed as a vast network of

interconnected pieces that function harmoniously. This strategy emphasizes the

significance of the social structure or any generally consistent social activity pattern.

Second, this method considers how any structure affects society as a whole and how

any social pattern affects that operation (Dillon, 2020). For example, the changes in

interest rates affect society in terms of buying or renting properties.

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Symbolic interactionism is seen as a micro-level strategy or individual strategy. In

symbolic interaction, society is seen as a drama or ongoing event that is constantly

evolving.

This method places a lot of emphasis on using symbols to communicate and exchange

ideas. According to this theory, society consists solely of the reality that individuals

create for themselves via their interactions with one another (Dillon, 2020). For

example, when you hear the word dog, your brain brings a picture of a four-legged

canine.

Last but not least, the conflict method is regarded as a macro-level strategy that

emphasizes inequity. In society, resources are distributed inequitably so that a minority

benefits at the expense of the majority. Conflict arises in a community due to the

unequal distribution of wanted resources. Those with the means create systems and

procedures to preserve these resources. This perspective sees society as being

constantly at war because those who lack resources are constantly coming up with new

ways to acquire them (Dillon, 2020). For example, employer always wish to pays as little

as possible for labor, while the employe wish to maximize their salaries.

Changes in Interest Rates

Lending money comes with a fees called an interest rate. Alternately, it might be

the payment for the risks and services involved in lending money. The situations

stimulate borrowing, lending, and spending, which keeps the economy running.

However, market interest rates always fluctuate, and various loan kinds offers different

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interest rates. Some of the factors in society that cause change in interest rate are the

lenders and borrowers, the type of loans, etc.

The Level of Risk

The possibility of the debt being repaid is referred to as the risk. Higher interest

levels result from a larger likelihood that the loan won’t be repaid. The interest rate will

likely be lower if the loan is “secured,” that is, if there is some kind of collateral that the

lender will be able to seize if the loan is not repaid, for example, a car, This is so

because the collateral covers the risk factor.

Secondly, there may be little to no loss on principle loaned out for some loans

that may be easily turned back into cash. Generally speaking, these loans have lower

interest rates. Since the government is the borrower, there is naturally less risk

associated with government-issued debt securities. The rate on Treasury securities is

often low due to this, plus the fact that the interest is tax-free.

Risk is affected by time as well. Long-term loans are more likely to go unpaid

since the adversity that causes default can develop over a longer period. Additionally,

lengthy Finally, a loan’s face value is much more susceptible to inflationary impacts than

a short-term loan is. Therefore, the lender should be compensated with greater interest

the lengthy the borrower has to repay the loan.

The Level of Demand and Supply

The supply and demand of credit affect interest rates level; higher or lower

demands for credit will result in higher or lower interest rate, respectively. In contrast,

the highest credit availability will result in lower interest rate, while a lowest credit

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availability will result in higher rate. Lenders’ decisions to postpone loan repayment

result in a reduced amount of credit accessible to the economy.

The Government

The interest rates that banks set on the money they lend is influenced by the

federal fund rates or the price that institutions charges one another for extremely short-

term loans. Later, other short-term loan rates will gradually be influenced by that rate

(Kuang

et al., 2019).

When the government purchase additional securities, bank receives an influx of money

that exceeds what they can use for lending, which lower interest rate. When the

government sell securities, bank funds are diverted for the transactions, leaving them

with less money available for lending, which forces an increase in interest rate (Jareno

et al., 2019).

Inflation

Interest rate levels will also be impacted by inflation. Interest rates are more likely

to increase the highest the inflation rate. It happens because lenders will demand higher

interest rates to make up for the declining purchase value of the money they will

eventually be paid (Jareno et al., 2019).

Effect of Interest Rates on the Ability to Buy or Rent Property

Capital Flow

Interest rates have a big impact on mortgage rates and funding expenses, which

impacts costs at the individual property level and, consequently, values.

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The largest influence on necessary rates of return and investment prices, however,

comes from the supply and demand for capital as well as competing investments.

The Federal Reserve Committee’s policies have directly impacted the value of all

investments. It has shifted its emphasis away from monetary policy and toward

regulating interest rate to boost the economy or ward off inflation (Sommer & Sullivan,

2018).

Interbank exchange rates are falling, which lowers the cost of funds and allows

more money to enter the system. The availability of funds, on the other hand, declines

as rates increase. Regarding real estates, the variations in interbank lending rates may

increase or decrease the available cash for investments. Demand and supply, or the

quantity of money available for real estate purchase and developments, are influenced

by the amount of capital and value (Sommer & Sullivan, 2018).

Valuation Fundamentals

The supply and demands for home, as well as the expense of building new

homes, all have an impact on real estate values. However, there’s more to evaluate

than that, particularly while considering how the government controls interest rates,

capital flows, and financing costs.

Discount Rates

Discount rates will alter as change in the interest rates that makes them up,

whereas risk premiums vary as a function of supply and demand and other market risk

factors. Real estate values decrease when the needed returns on alternatives or rival

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investments grow; in contrast, prices rise when interest rates decrease (Forrest, Murie &

Williams, 2021).

References

Dillon, M. (2020). Introduction to sociological theory: Theorists, concepts, and their applicability to

the twenty-first century. John Wiley & Sons.

Forrest, R., Murie, A., & Williams, P. (2021). Home ownership: Differentiation and fragmentation.

Routledge.

Johnson, D. P. (2022). Contemporary sociological theory: An integrated multi-level approach.

Springer Science & Business Media.

Jareño, Francisco, Marta Tolentino, María D. González, and Alejandro Oliver. “Impact of changes in the

level, slope and curvature of interest rates on U.S. sector returns: an asymmetric nonlinear

cointegration approach.” Economic Research-Ekonomska Istraživanja 32, no. 1 (2019), 1275-1297.

doi:10.1080/1331677x.2019.1632726.

Kuang, W., Liu, C., Wu, Q., & Zeng, H. (2019). How do interest rate changes affect mortgage

curtailments? Evidence from China. Real Estate Economics, 49(S2), 395-427.

https://doi.org/10.1111/1540- 6229.12285

Segal, T. “How Interest Rates Affect Property Values.” Investopedia. Last modified May 11, 2022.

https://www.investopedia.com/articles/mortgages-real-estate/08/interest-rates-affect-property-

values.asp.

Sommer, Kamila, and Paul Sullivan. “Implications of US Tax Policy for House Prices, Rents, and

Homeownership.” American Economic Review 108, no. 2 (2018), 241-274.

doi:10.1257/aer.20141751.

https://doi.org/10.1111/1540-

https://doi.org/10.1111/1540-6229.12285

https://www.investopedia.com/articles/mortgages-real-estate/08/interest-rates-affect-property-