Final answer:
The mortgage market significantly influences the real estate market, affecting affordability, demand, and prices of homes. It can also influence overall economic conditions, impacting individual and institutional investment decisions.
Step-by-step explanation:
The statement that the mortgage market is one of the factors that can affect the real estate market in comparison to other investment options in a capital market is true. The mortgage market plays a significant role in the real estate sector because it determines how affordable borrowing money for a home purchase is. When mortgage interest rates are low, borrowing becomes more affordable, which can increase demand for real estate, potentially driving up prices. Conversely, high interest rates can make borrowing more expensive, reducing demand, and potentially lowering prices.
During periods of housing market growth, households may take on more debt, leveraging their homes to invest in other assets, such as stocks. However, when housing prices decline, borrowers can end up owing more than their home's worth, which can lead to financial distress and contribute to economic downturns, as seen during the 2008-2009 Great Recession.
For investors and banks, the mortgage market's impact on interest rates and overall economic conditions can influence the decisions on where to allocate capital, whether in the relatively stable real estate market or in other financial assets that may offer higher returns but come with increased risk.