The Effect of Credit Constraints on Housing Prices: (Further) Evidence from a Survey Experiment

Abstract

The response of housing prices to financing conditions is determined by the effect on the marginal buyer, not the average household. I use heterogeneous willingness to pay (WTP) data from a stated preference experiment in Fuster and Zafar (2021) to estimate the effects of changes in mortgage rates and collateral constraints on housing prices by analysing the structure of housing demand curves. This work builds on their research, which focused on average changes in WTP. Relaxing down payment constraints has a large average effect on WTP, but the effect on price is less than half as large. Financially constrained households tend to respond more to relaxed constraints, but those households often have WTPs that are too low to affect market prices. Changing the mortgage rate has the same average effect on WTPs and on market prices, because there is no systematic relationship between a household's response to mortgage rates and their location on the demand curve. I use a heterogeneous user cost model of individual WTPs to understand how household heterogeneity determines the structure of overall housing demand. An empirical model using observable household characteristics allows the experimental findings to be applied to other household survey data to simulate the effects of credit conditions. The simulated effects of easing collateral constraints in Australia are fairly stable over the past 20 years, and show a similar pattern to the US results.