Credit Constraints, House Prices, and the Impact of Life Cycle Dynamics

Working Paper Number: 
WP 18-07

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.

JEL Codes: 
D15, D31, E21, E44, G11, G12, G21, R21, R31