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Does easy credit (e.g. lower minimum down payment, lower interest rate) cause housing prices (purchase, rent) in that area to be more expensive? Intuitively, this seems to be the case, because the availability of credit means more people can be a potential buyer, which drives up demands, which should increase price. Has there been an empirical research that backed this up or refuted it?

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    $\begingroup$ Empirical or theoretical research? Or both? $\endgroup$ – BKay Nov 10 '16 at 13:28
  • $\begingroup$ I prefer empirical (edited the question) $\endgroup$ – user69715 Nov 10 '16 at 22:52
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    $\begingroup$ If one believes the effect is symmetric to some degree, you can also look for evidence for the other direction: does tightening credit cause declines in housing prices. $\endgroup$ – Paul Nov 11 '16 at 1:34
  • $\begingroup$ Not quite what you asked, but anyway: the book "The greatest trade ever" explains how John Paulson predicted the credit crunch. They drew a graph of house prices adjusted for inflation, saw a sharp upswing around 2000, and realised this coincided with loosened lending requirements. $\endgroup$ – paj28 Nov 11 '16 at 11:08
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Theoretically, multiperiod borrow and lend models I am familiar with suggest that an increase in ease of credit (increasing the credit supply) should increase demand. This in turn raises the price of housing. So I believe your intuition here is correct.

Empirically, I am only familiar with one paper analyzing this relationship, which finds the same thing.

...because of geographic diversification, treated banks expand credit: Housing demand increases, house prices rise, but to a lesser extent in areas with elastic housing supply, where the housing stock increases instead.

Credit Supply and the Price of Housing

Favara and Imbs (2014)

http://www.jeanimbs.com/papers2_files/Favara_Imbs_May2014.pdf

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    $\begingroup$ (+1). The excerpt says it essentially all: it pushes prices up but also supply of houses, if this is feasible in the area. But building and offering new houses takes more time than offering increased credit, so we expect a net rise in house prices at least in the short term. $\endgroup$ – Alecos Papadopoulos Nov 10 '16 at 23:43

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