Question

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.

Answer 1

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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.