Know the Recursive Relationship between Real Estate and money supply

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Know the Recursive Relationship Between Real
Estate Money Supply
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Nowadays, thanks to globalization, the major
economies around the world are witnessing
tremendous growth and this is also having a
positive impact on the growth of the commercial
real estate sector.
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The relationship between real estate and money
supply is direct if you are a stakeholder in
the real estate sector, then it is imperative for
you to know about it.
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Most of the people will not be aware of the fact
that the real estate also ends up creating more
money supply.
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Here are the details about the recursive
relationship between the real estate and money
supply and the way they spur each others growth.
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Self-perpetuating money supply
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The modern system of real estate investing gives
rise to a situation where the money supply in the
system gets catapulted.
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This increased money supply then finds its way
once again into the real estate sector this
never-ending cycle between the banking system
real estate increases the price of the real
estate.
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However, the fundamentals of the economy deal
with the income levels of the people and if the
income levels don't rise, then the high prices of
these properties create a real estate bubble.
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Nevertheless, in the long run, due to this
process, the real estate investments end up
propping the money supply and creates a
self-enforcing and amplifying loop.
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Mortgages gives rise to money creation
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Most of the investors borrow money for their
investment this will appear as a normal process
to anyone, however, the modern banking system
works differently.
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The banks do not sanction loans based on
existing money, they create new money when
approving loans.
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With regard to this whenever a bank sanctions
mortgage loan for a real estate, it creates that
money and pumps it into the system.
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The higher the number of mortgages, the more
money there will be in the system it can be
verified by comparing the growth of mortgage
loans to the amount of money supply in the
economy.
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Inflation leads to high prices
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The money that gets created due to the result of
the mortgages finds its way back to the real
estate sector.
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This is possible due to the fact that increasing
demand for the real estate spurs the price of
properties leading to buyers buying what seems to
be profitable investments.
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In addition to this, excess money combined with
rising demands for commercial properties leads to
the growth in prices of real estate units.
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This has a positive impact on the investors as
it confirms their belief that real estate is a
profitable investment.
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