- Now and then, there is an inbalance in supply and demand. Sometimes, this inbalance becomes very big. For example, suppose that mortgage interest rate is cut by half.
- That means that you can, in theory, take a loan twice as big.
- The first and immediate result is that people get more money to spend.
- The second result is that people, in theory, can afford real estates for twice the price.
- If the interest rate stays low for a while, the estate prices will increase a lot every year, for several years.
- After a couple of years, the estate price should stop at approximately twice the price before the change of the interest rate.
- But, because of the years of constant growth, some people now believe that the price can continue to grow.
- The increase of price is now more like a pyramid game. It will continue until there is some disturbance.
What can make this chain of events even worse is if there are investments with leverage. That is, investors take loan to invest even more.
Change of interest rates is a simple example. Another common scenario is a technological change that will change the conditions for a market.
