What is the impact of interest rates on real estate values?

The relationship between interest rates and real estate values is significant and typically inversely correlated. When interest rates rise, the cost of borrowing increases. This generally means higher monthly mortgage payments for buyers, which can reduce affordability and lessen the demand for properties. As demand decreases, property values tend to decline.

Higher interest rates can also impact investor behavior. Investors may seek different types of investments that offer better returns relative to the increased cost of financing, leading to a reduction in capital flow into real estate. Therefore, the correct answer indicates that higher interest rates generally lead to lower property values because they directly affect buyers' purchasing power and overall market demand for real estate.