An unsustainable weakening of credit standards induced a US mortgage and housing bubble whose consumption impact was amplified by innovations altering the collateral role of housing. In countries with more stable credit standards, any overshooting of construction and house prices owed more to traditional housing supply and demand factors. Housing collateral effects on consumption varied, depending on the liquidity of housing wealth. Lessons include recognizing the importance of financial innovation, regulation, housing policies, and global financial imbalances for fueling credit, construction, house price and consumption cycles that vary across countries.

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April 2010     Paper Number SERCDP0049

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