Real Estate and Inducement of Money

The quantity of money that enters the real estate market is directly correlated with the amount of money supply that is accessible in the system. This is due to the fact that one of the most popular investment categories worldwide is real estate. It is regarded as a refuge of safety and one of the most secure hedges against inflation.

Nevertheless, relatively few individuals are aware that real estate also leads to increased money supply! This is a result of the operation of the current fractional reserve banking system. Mortgage loans are made more frequently and at greater rates when more real estate is produced. This article has described the recursive relationship between real estate and the money supply as well as how they reinforce one another.

 

Self Perpetuating Money Supply

Real estate catapults the available money supply in the modern real estate investing system, which generates this circumstance. The real estate industry then receives this additional money supply once more. Rising real estate prices are a result of this constant back and forth between the banking and real estate systems.

These increasing prices are frequently a real estate bubble since the economic fundamentals, such as income levels, are staying the same. Prices temporarily drop when this bubble bursts, causing a drop in value. Real estate investments, however, ultimately support the money supply and produce a self-reinforcing and amplifying cycle because of the process's fundamental structure.

Mortgages Create Money

In wealthy countries around the world, almost 80% of home purchases are made with borrowed funds. As a result, the terms "home purchase" and "mortgage" are interchangeable. Until one takes into account how the current financial system functions, this looks to be a routine occurrence.

When banks make loans, they do not lend out already-existing money but rather generate new money. As a result, each time a bank extends a mortgage loan, it creates new money and injects it into the economy. There will therefore be more money in the system the more mortgages there are. By comparing the increase of mortgage loans in the banking sector to the amount of available money in the economy, it is simple and practically proven that this is true. Nearly at the same time, the two charts move!

Money Creates High Inflation

The issue with fresh money being created is that it circulates within the system, which is now. It gets its value by devaluing other forms of money that are in use. As a result, there was very substantial inflation in the market in nations like the United States during the period of flourishing mortgage markets. Workers are experiencing a real wage loss as a result of the high inflation and weak wage growth.

Inflation Creates High Prices

The real estate industry once more receives a major portion of the money made possible by the mortgages. This is due to the fact that as real estate prices rise due to rising demand, people line up to purchase what seem to be "profitable investments."

Real estate prices are now rising as a result of systemic excesses in both money and demand. This gives investors even more assurance that real estate is a highly lucrative investment. The real estate values, which at first seemed to be excessively high considering the economic foundations, remain that way, and the illusion starts to become reality! Real estate price inflation becomes the new standard.

Speculation Creates More Mortgages

Speculators strive to join the party when they notice that some of their peers have profited from real estate speculation. As a result, the real estate market is put under even more upward pressure as speculative objectives suddenly intersect with excess money and demand!

This is the ideal formula for creating a bubble. Speculators use self-reinforcing feedback loops to drive prices sky high. Price increases in the past serve as justification for price increases in the future! In this time, both mortgage rates and home prices have grown quickly.

The Bust Phase

The bubble finally explodes at an unpredicted moment in time. The economy's unsustainable economic situation is the main cause of the bust. Many borrowers are currently unable to pay their banks because of their current financial situation. The bank must therefore foreclose on these properties and record the losses. But very few people are aware that when banks write off these losses, they literally disappear the money. Since mortgages were the primary factor in the creation of money, when they go, the money with them. The system's overall money supply is thus decreased, which gives the impression that prices have decreased.

As a result, mortgages and home prices have a significant impact on the economy's money supply. Real estate prices end up having a significant impact on the economy as a whole because the money supply is one of the key economic characteristics.

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