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Suppose investors on the asset market quadrant of the four quadrant model can borrow money at...

Suppose investors on the asset market quadrant of the four quadrant model can borrow money at a lower interest rate from lenders. What is the impact on the whole real estate system? Explain and show graphically.

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Answer:

-> By allowing investors to borrow at a lower interest rate from the lenders, there will be an an increase in demand in the asset or property market.

->This demand increase is equivalent to an increase in the price, that the investors are willing to pay for real estate maket per dollar of rental income, or, equivalently, a decrease in the cap rate.

This can be explained graphically as,

-> Note how Initially, the prices of real estate would increase dramatically (boom), but then fall back a nudge (bust) as the market returns to its long-run steady state due to new constructions in the market.

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