How do economic factors such as interest rates affect property valuation?

Higher interest rates typically have a direct impact on buyer purchasing power, which in turn influences property values. When interest rates rise, the cost of borrowing money increases. This means that potential buyers may not be able to afford as expensive a property since higher mortgage rates lead to increased monthly payments. Consequently, this reduction in purchasing power often leads to lower demand for properties. As demand decreases, property values may stabilize or decline, reflecting the market's response to reduced buyer affordability.

In contrast, lower interest rates tend to enhance buyer purchasing power, allowing more individuals to enter the housing market, which generally increases property demand and can raise values. Understanding this relationship between interest rates and property valuation is crucial for appraisers and real estate professionals as they assess market conditions and trends.