Financial Constraints and House Prices—An International Perspective

In this paper, we show substantial empirical evidence that house prices are more sensitive to shocks to per-capita income, in countries where housing finance is more developed. This result is consistent with the theoretical framework developed in the paper, where we study the impact of progressive relaxation of financial constraints on housing demand and equilibrium house prices. Our results are consistent with recent literature on financial constraints and business investment, which argues that the investment of less constrained firms can be more sensitive to changes in cash flow. More broadly, our results challenge the traditional view that financial development leads to smaller fluctuations in key economic variables. From a policy perspective, our paper suggests that even if financial development is desirable for other reasons, the associated increase in the extent of fluctuations should be an explicit policy concern