1. Consider a hypothetical city. An apartment in this city rents for a $14,000/year. Assume that the interest rate is 7%.
(a) Assuming no expected rental rate growth, taxes or maintenance cost, calculate the value (potential sales price) of the apartment. Also calculate the price-torent ratio.
(b) Like the first part, but assume now that the expected growth rate of rents is 2%.
(c) What if the expected rate of growth is:
i. -3% (expected negative price growth) ?
ii. 5%?
(d) What happens to the value of the apartment and the price to rent ratio when the expected growth rate approaches 7%.