Credit Constraints, House Prices, and the Impact of Life Cycle Dynamics
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How does the life cycle--namely, mortality risk and the expectation at birth of a rising age-profile of income and assets--impact house price dynamics? This paper investigates how equilibrium house prices respond to a tightening in credit constraints under two different but similarly calibrated models: one an infinite-horizon setting and the other a life-cycle environment. The main conclusion is that house price dynamics are magnified by the presence of life cycle features. Two primary explanations stand out: the distinction between stocks and flows of mortgage debt in the cross-section and the importance of gross housing tenure flows, i.e. churn.