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SERC/Urban and Spatial Programme Discussion Paper
House Prices and Credit Constraints: Making Sense of the U.S. Experience
John V. Duca, John Muellbauer and Anthony Murphy
March 2011
Paper No' SERCDP0077:
Full Paper (pdf)

JEL Classification: R31; G21; E51; C51; C52

Tags: house prices; credit standards; subprime mortgages

Most US house price models break down in the mid-2000's, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers – into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.