The lenders withdraw
If CR = (d-g) and d is constant, the only way for capitalization rates to fall (prices rise) is for g to grow larger. When g passes a believability threshold buyers refuse to make higher down payments. The lenders having already dropped out in the form of reducing LTVs, when the buyers stop increasing down payments prices stop rising. The graphics below illustrate what is happening. Both show the intersection of two planes. One of these is the XDCR BTCF = 0 plane. The other, sloping downward to the front, is the plane of all the non-zero XDCR values that may be obtained given the specified interest rate and capitalization rate. Since we assume that in a seller's market buyers bid prices up to the point where XDCR is zero, all positive values of XDCR may be ignored. Since we also assume that lenders will not permit negative cash flow, all negative values of XDCR are ruled out. Thus, all that matters is the line where the two planes meet. It is along that line that all permissible transactions may take place. As cap rates fall (prices rise), lenders begin restricting funds in the form of lower LTVs. The number of possible transactions, as evidenced by the length of the line of intersection, shrinks. No transaction can take place at any higher interest rate that the one at the point of intersection as XDCR would be negative at that rate. This underscores the common sense that real estate bubbles are sensitive to interest rates.
