TREAT US LIKE IMBECILES? | 7.1] Inflating the Bubble.

The value of land as an asset is linked to interest rates.

If the cost of money is 10%, land’s value would tend to be a multiple of 10 times the rent it generates.

So if rent is $10 p/square metre, and the interest rate is 10%, the sale value of the land is $100 p/ m².

If the US Fed, Bank of England or the Reserve Bank of Aust. slashed interest rates in half to 5%, the value of land would tend to double.

If rents are $10p/m², someone selling his land would want a multiple of 20 times that rental income.

Therefore, the site would tend to sell for around $200.

From this simple illustration, it is clear that when central bankers force interest rates up or down, they automatically trigger changes in property values.

It is disingenuous, therefore, for them to disclaim responsibility for brewing a bubble, as Alan Greenspan did in his Financial Times article on 7th April, 2008 (headlined: ‘The Fed is blameless on the property bubble’).

Greenspan now places all the blame on investment bankers.

But when the US Fed under his chairmanship slashed interest rates to 1%, there could be only one outcome: the value of real estate would explode.

Likewise, when the Fed changed course and raised interest rates, the influence would be in the reverse direction – downward pressure on land prices.

Excerpt. 2010: The Inquest by Fred Harrison

...Understand? Obvious again. Greed.