Topic: Determinants of Residential Investment
Understanding the Question:
Which statement incorrectly describes the behavior of investment in the housing market?
Key Formulas and Approach:
The user cost of housing is roughly: $R = i - \pi + \text{depreciation}$, where $i$ is the nominal interest rate and $\pi$ is inflation.
Detailed Solution:
Step 1: Evaluate Statement (A). Like any asset, housing demand depends on the real return (capital gains + rental yield - costs). This is correct.
Step 2: Evaluate Statement (B). High inflation usually means high nominal rates, but it often increases housing prices, which can protect investment value. (Note: The user-provided correct answer identifies (C) as the primary error).
Step 3: Analyze Interest Rate Sensitivity (Statement C). Housing is typically the most interest-rate-sensitive component of aggregate demand. Most people buy homes via mortgages; therefore, even small changes in the nominal interest rate significantly change monthly payments and demand.
Step 4: Evaluate Statement (D). Since the real interest rate ($r = i - \pi$) is the cost of borrowing, cost of ownership is indeed highly sensitive to it.
Conclusion: Statement (C) is false because housing demand is highly sensitive to nominal interest rates.