TOPIC FOCUS: How Interest Rates Affect Property Values

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TOPIC FOCUS: How Interest Rates Affect Property Values

Read the article and answer these questions

1. What affects the value of real estate?

2. What is involved in the valuation of property income?

3. What does the property-level cost depend on?

4. What are the factors to determine property values?

5. What is the difference between a capitalization rate and a discount rate?

6. When does the real estate value fall or increase?

Interest rates, especially the rates on interbank exchanges and Treasury bills, have as profound an effect on the value of income-producing real estate as on any investment vehicle. Because their influence on an individual's ability to purchase residential properties (by increasing or decreasing the cost of mortgage capital) is so profound, many people incorrectly assume that the only deciding factor in real estate valuation is the current mortgage rate. However, mortgage rates are only one interest-related factor influencing property values. Because interest rates also affect capital flows, the supply and demand for capital and investors' required rates of return on investment, interest rates drive property prices in a variety of ways.

Valuation Fundamentals

 In simple terms, the valuation starts by forecasting property income, which takes the form of anticipated lease payments or, in the case of hotels, anticipated occupancy multiplied by the average cost per room. Then, by taking all property-level costs, including the financing cost, the analyst arrives at the net operating income (NOI), or cash flow remaining after all operating expenses.

Capital Flows

Interest rates can significantly affect the cost of financing and mortgage rates, which in turn affects property-level costs and thus influences values. However, supply and demand for capital and competing investments have the greatest impact on required rates of return and investment values.

 These changes in capital flows can also have a direct impact on the supply and demand dynamics for property. The cost of capital and capital availability affect supply by providing additional capital for property development; they also influence the population of potential purchasers seeking deals. These two factors work together to determine property values.

Discount Rates

The most evident impact of interest rates on real estate values can be seen in the derivation of discount or capitalization rates. The capitalization rate can be viewed as an investor's required dividend rate, while a discount rate equals an investor's total return requirements. 

Each of these rates is influenced by prevailing interest rates because they are equal to the risk-free rate plus a risk premium. For most investors, the risk-free rate is the rate on U.S. Treasuries; guaranteed by federal government credit, they are considered risk-free because the probability of default is so low. 

Although risk premiums vary as a result of supply and demand and other risk factors in the market, discount rates will vary due to changes in the interest rates that make them up. When the required returns on competing or substitute investments rise, real estate values fall; conversely, when interest rates fall, real estate prices increase.



By Robert Stammers | Updated December 8, 2017



Taxes throughout Russian history

The beard tax

Beards might seem like an odd target for taxation, but to Peter the Great (1672-1725)—Russia’s revolutionary Tsar—facial hair was no laughing matter.

Late in the 17th century by a special decree, Tsar Peter the Great established a tax on beard in an effort to westernize Russian society. The Tsar implemented his plans in a rather brutal way.

On his return from Western Europe Peter I gathered all his servants with high social or political status for official reception party. Tsar’s guests expected some chops and changes to take place, but they would not have assumed what Peter I had in mind. First the Tsar heartily, with open arms welcomed every guest, then started removing their beards with large scissors. All were absolutely terrified, filled with resentments, but obeyed.

To wear hair on the face was a traditional fashion for male population and almost all the men wore long, full, graceful beards. Beards were associated with virility and masculinity, they were a visual proof of sexuality and gender. Many thought it a sin to have a shaved face and considered Peter’s edict as a wrong immoral act. During the rule of Tsar Peter I neatly shaved faces were not in vogue, and many beard wearers wanted to keep their cherished beards. They rebelled and fight to stop the ban on beards. They were despotically punished: their beards were cut off by force in public places.

After introduction of the odd eccentric tax, only clergymen and monks conserved the right to carry a beard. Smelling a profit,  Peter imposed an annual “beard tax” upon those who hoped to keep their facial hair. After payment they received a special token confirming that they had paid. The token was made of bronze, copper or even silver with a two-headed Russian eagle on one side and the text “Money paid” along with man’s face (only nose, lips and chin) with mustache and beard on the other side.

The beard tax was a heavy burden levied on those who still were full of affection for their beards and mustaches. They were obliged to pay annually a huge sum of money. There were 4 groups: 1) high-born persons, state officials were forced to pay annually six hundred rubles (a pot of money in the epoch of Peter reign); 2) negotiants were compelled to pay one hundred rubles; 3) tradesfolk had to pay sixty rubles; 4) low ranked Moscow population paid thirty rubles. Peasants were allowed to carry mustache or beard in the country but they had to pay two kopeck coin for it when they entered or left the city. Despite the fee’s widespread unpopularity, it remained in place 47 years after Peter’s death. The tax was abolished by the Act of 1772.



Make up the summary of the text using the questions to organize your answer:

1. When and why did Tsar Peter the Great establish a tax on beard?

2. How did the Tsar act towards his servants with high social or political status at the official reception party?

3. Why were the guest terrified, filled with resentments after the official meeting?

4. Who conserved the right to carry a beard?

5. Why did the Tsar introduce a special token? What could be seen on the either side of the token?

6. How long did the unpopular decree remain in place?


Vocabulary notes

westernize                          европеизировать

chop                                  зд. менять

assume                              предполагать

resentment                         чувство обиды

obey                                  подчиниться

graceful                              зд. доставляющий удовольствие

virility and masculinity     мужественность и смелость

sin                                     грех

in vogue                             в моде

rebel                                  бунтовать

clergymen and monks        священники и монахи

negotiants                          купцы

compel                               принуждать

abolish                               упразднять





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