There are two distinct inter-related parts to the question. First the student is required to explain gearing, distinguishing between capital and interest gearing.
These should be explained in terms of ratios – ratio of debt to capital employed or debt interest payments to income.
An answer should explain how high gearing helps make high returns when capital values are rising but is disastrous when values are falling because investor’s capital disappears.
Both these states are relevant to a property cycle which can be explained either as a bubble or the result of the interaction of demand and supply time lags. Gearing should be shown to exaggerate the cycle on the upward and downward slopes.
