I study how the structure of the financial sector impacts the co-movement of house prices and mortgage credit. I examine three possible drivers of mort- gage credit: 1) variations in the loan-to-value maximum (“LTV liberalization”), 2) variations in preferences for housing unrelated to financial conditions (“preference boom”), and 3) variations in the ability of securitizers to issue mortgage credit (“innovation in securitization”). I find, consistent with the existing literature, that increases in mortgage credit driven by LTV liberalization have a puzzlingly small impact on house prices relative to the co-movement of house prices and mortgage credit associated with the preference boom. By adding the innovation in securiti- zation channel, I can explain an equal co-movement in mortgage credit and house prices via factors inside the financial sector, solving this puzzle in the literature. Because of the existence of the innovation in securitization channel in my model I am able to connect variations in credit supply to variations in the leverage of finan- cial institutions. This opens the door to studying the impact of leverage constraints on the build-up of household mortgage credit and of house price dynamics.

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