Please correct me if I am wrong. If everything is right, does that mean that I shouldn’t buy real estate when the market is high because there is a lot of credit in the market and when there is, sooner or later the debt is going to exceed the income and the cycle will go tumbling down. Hence, I should buy real estate when the cycle is on the downside and interest rates drop to help bring the economy back up. I got this information after heavy research on google and youtube but I am probably lacking crucial detail so it would be amazing if you could guide me on this journey. Thanks!
One person's spending is another's income. Hence, when the banks lower interest rates, people start to lend more and buy new things that they want. This leads to a short term debt cycle as when people take loans, they literally create credit out of thin air. Hence, when people have more money to buy things, everyone starts buying more items and since one person's spending is another's income, the cycle repeats. However, when their spending power becomes too high and everyone wants a certain product, the prices for that certain product goes up, which is called inflation as demand exceeds supply. However, since the central bank does not want too much inflation, it increases the interest rates, resulting in fewer people being unable to afford loans and hence the costs of existing debt rises. Hence, incomes drop as when borrowing slows and they have a higher debt repayment, their spending will decrease too. Since one person's spending is another's income, everyone income drops. When people spend less, prices go down, resulting in deflation. Hence, the entire cycle repeats as now the bank will decrease interest rates, allowing the economy to get back up again. This entire cycle is called the short term debt cycle (typically lasts 5-8 years and keeps repeating for decades). However, after every short term debt cycle, there would be more growth after each cycle and also more debt. This is because people push it as they have an inclination to borrow more and spend more instead of paying back debt. This results in debt rising faster than incomes over a long period of time, creating the long term debt cycle. This happens when debt increases faster than income. When that happens, people tend to spend less and when people spend less, everyone gets affected. People become less creditworthy (how worthy you are to be able to lend) causing borrowing to go down. While that happens, debt repayment continues to rise and hence, everyone starts spending less. Interest rates cannot be lowered to save the day because it is already super low and everyone cannot borrow because they are not creditworthy. Borrows lost their ability to pay because the debt is too big and their collateral has lost value (property, stocks etc. etc.). Their collateral loses money because everyone rushes to sell their assets to pay their debt and when everyone does it at the same time, the prices of everything goes down, resulting in the stock market crashing and real estate losing value. Banks start to lose out too as everyone rushes to withdraw their money but banks do not have enough so they will have to file for bankruptcy. This results in people being even less creditworthy. The difference between short term and long term debt cycle is that in the long term, the debt burden has become too big and cannot be relieved by lowering interest rates.
