<p>No, it's not correct. It's generally assumed that in the absence of risk (which I believe you should ignore in this question), investment in different types of assets should yield the same returns. If I had \$100k I could lend it at 5% earning \$5k of interest after a year. Alternatively I can buy \$100k house now and sell it in a year. If I do that I get the difference in price (\$2k) and rental income. What the rental income must be so that those two types of investment are equally good.</p>

<p>(For easier exposition I assumed that interest rate on borrowings and savings are the same. The logic, however, is exactly the same).</p>

CC BY-SA 3.0
2017-04-28T10:59:52.460Z
Thanks so much! So the rent will be $3$?
onelessproblem
CC BY-SA 3.0
2017-04-28T13:34:56.423Z
Yes but make sure you understand that it will be 3% of the house's value, not just $3K or whatever. Year 1 the rent would be 100 * .03 = 3. year 2 the house's value would be 102 meaning that the rent would be 102 * .03 = 3.06.
TheSaint321
CC BY-SA 3.0
2017-04-28T09:47:26.367Z
2017-04-28T09:47:26.367Z
ElChorro
<blockquote>
  <p>It the real rate of interest on borrowing is $5$ percent per annum and
  housing prices rise at $2$ percent, then according to the neoclassical
  theory of investment with the price of houses at $100$, the rental for
  houses (over the year) must be?</p>
</blockquote>

<p>The price of property after an year will be $102$ and the person will receive an interest of $5$. Therefore, the rent should be $(102+5)-100=7$? Is this correct?</p>

<macroeconomics><interest-rate>
Calculate rental rate in this exercise
onelessproblem
# Calculate rental rate in this exercise

(Asked by: username_0 on 2017-04-28)

> It the real rate of interest on borrowing is $5$ percent per annum and
> housing prices rise at $2$ percent, then according to the neoclassical
> theory of investment with the price of houses at $100$, the rental for
> houses (over the year) must be?

The price of property after an year will be $102$ and the person will receive an interest of $5$. Therefore, the rent should be $(102+5)-100=7$? Is this correct?

**Tags:** macroeconomics, interest-rate

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## 1 answers

### Answer by username_1 on 2017-04-28. Score: 0 | Accepted answer

No, it's not correct. It's generally assumed that in the absence of risk (which I believe you should ignore in this question), investment in different types of assets should yield the same returns. If I had \$100k I could lend it at 5% earning \$5k of interest after a year. Alternatively I can buy \$100k house now and sell it in a year. If I do that I get the difference in price (\$2k) and rental income. What the rental income must be so that those two types of investment are equally good.

(For easier exposition I assumed that interest rate on borrowings and savings are the same. The logic, however, is exactly the same).

> **Comments:**
> **username_0**: Thanks so much! So the rent will be $3$?  
> **username_2**: Yes but make sure you understand that it will be 3% of the house's value, not just $3K or whatever. Year 1 the rent would be 100 * .03 = 3. year 2 the house's value would be 102 meaning that the rent would be 102 * .03 = 3.06.  

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