# Calculate rental rate in this exercise [closed]

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?

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.
• Thanks so much! So the rent will be $3$? Apr 28, 2017 at 10:59