Question

Olivia is 18 and would like to buy a house when she is 30. What is the discount factor for today’s prices if the housing values increase 8% per year?

Answer 1

x --> 1.08x (1year)--> 1.08^2 (2 years) --> So when she 30: 30 - 18 = 12 years
\[y = 1.08^{12} x\] \[\approx 2.51817 x\]

Therefore, if she buys house today, she will get a discount factor of prices

\[DF = \frac{x}{y} = \frac{1}{2.51817} \approx 0.397\]
or nearly 40% discount if buying today