Abstract
I develop a new search-theoretic framework to study the effect of credit conditions on real house prices. I incorporate a credit market and a frictional, heterogeneous housing market into a framework that has an explicit role for money. I
nd that easing of credit conditions, with higher loan-to-value (LTV) ratio and lower mortgage interest rate, pushes up real house prices, and vice versa. I show that changes to credit conditions faced by the marginal buyer affect trading volume and prices in the overall housing market. By modelling explicitly the frictional nature of the housing market,I capture the non-linear dynamics between the LTV ratio and real house prices. I demonstrate that changes to the LTV ratio have a greater effect on real house prices than changes to the mortgage rate and that regulat-ing the LTV ratio is an e¤ective tool for policymakers wanting to mitigate uctuations in the housing market.
JEL: E44, G21, R31
Keywords: House Prices, Loan-to-value ratio, Borrowing rate, Search and matching
