Most US house price models break down in the mid‐2000s, due to the omission of exogenous changes in mortgage credit supply (associated with the sub‐prime mortgage boom) from house price‐to‐rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first‐time home‐buyers. Incorporating a measure of credit conditions – the cyclically adjusted loan‐to‐value ratio for first‐time buyers – into house price‐to‐rent ratio models yields stable long‐run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.
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Duca et al. (2011) studied this question.
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