Do Credit Conditions Move House Prices?

o what extent did an expansion and contraction of credit drive the housing boom and bust? The existing literature lacks consensus, with findings ranging from credit having no effect to credit driving the entire house price cycle. We show that the key difference behind these disparate results is how rental markets are modeled: assuming perfect segmentation between rental and owner-occupied housing leads to large effects of credit on house prices, while assuming frictionless rental markets makes credit irrelevant for house prices. We develop a model with frictional rental markets that nests both extremes and allows us to consider intermediate cases. We argue that the relative elasticity of the price-to-rent ratio and homeownership with respect to an identified credit shock is a sufficient statistic to measure these frictions, estimate this moment, and use it to calibrate our model. Our result imply that rental markets are highly frictional and close to segmented, consistent with large effects of credit on house prices. Experiments using the structural model imply that credit conditions explain 47% - 57% of the rise in price-rent ratios over the boom.