There is a direct link between the available money supply and how much money finds its way into mexico real estate tulum markets. This is because realty is one of the most desired investment classes in the globe. It is considered the safest and most secure way to hedge against inflation.
However, few people are aware that real property can also increase the money supply. This is because the modern fractional reserves banking system works. The money supply grows as more real property is created and more mortgage loans are issued. This article discusses the reciprocal relationship between reality and money supply. Also, how they propel each other higher.
Self Perpetuating Money Supply
The modern system for real estate investment has the effect of increasing the money supply. This increases the money supply then flows back into real estate. The environment for rising real-estate prices is created by the constant back and forth between real estate and banking systems.
Fundamentals of the economy, i.e. Rising prices can often be attributed to a real estate bubble, as income levels and the fundamentals of the economy (i.e. Prices drop for a few days after the bubble bursts. In the long term, however, because of the nature and process of real estate investments, they end up supporting the money supply and creating a self-enforcing loop.
Mortgages can create wealth
Borrowing money accounts for around 80% of house purchase transactions across developed countries. The term “house buy” can be seen as synonymous with “mortgage”. This seems like an ordinary thing until you think about how modern banks work.
Existing money is not lent out by banks. Instead, banks make new money through loans. Therefore, when a bank lends money to a borrower for a mortgage, it creates that money and pumps it into the system. So, the more mortgages, the more money will be in your system. This fact is easy to prove empirically. It can be done by comparing the growth of mortgage loans within the banking industry with the amount of money available in the economy. These charts almost move in tandem!
Money causes high inflation
This is where the problem lies. The money that’s created revolves around the system. It is created by devaluing the existing money. So, during the boom years of the US mortgage markets, there was an extremely high level of inflation. Combining high inflation with stagnant wages growth results in a situation where workers lose real wages.
High prices due to inflation
The mortgages created money which is now largely going into real estate again. This is because rising demand for real property drives up prices, prompting buyers to wait in line to buy “profitable investments”.
This leads to an increase in prices for real property units due to excess demand and excess money. This gives investors more confidence that real estate can be a highly profitable investment. Real estate prices, which appeared high despite the economic fundamentals, continue to rise and become reality. The new normal is inflated real estate prices.
More Mortgages from Speculation
Speculators see their peers make money by speculating real estate. So they join the party. This increases the pressure on real estate as more money and less demand meets speculative needs.
This is the perfect recipe for a bubble. Speculators are responsible for driving the prices sky high through self-reinforcing Feedback Loops. The past is the basis for the future, and higher prices are justified. This period also saw rapid increases in the prices of housing and mortgages.
The Bust Phase
The bubble bursts unexpectedly at the end. The unsustainable economic environment in the economy is the main reason the bubble burst. Many borrowers cannot pay their banks anymore at this point. This causes the bank to foreclose the homes and write down losses. It is not well known that banks will write off these losses to make them disappear. The money disappears when mortgages cease to exist since they are the ones that created it. In turn, the total amount of money in the system decreases and the prices appear to be falling.
Therefore, mortgages, as well as real estate prices, have a large influence on the economy’s cash supply. Since the money supply is an important economic parameter, real property prices have a major impact on the whole economy.