Credit cycles and real estate cycles

We analyze the relationship between credit cycles and real estate cycles. Until recently, there has been quite little research on this topic. However, the subprime crisis of 2007-2009 has fostered an academic literature dealing with both real estate valuation driving credit markets and vice versa. Our categorization of the respective literature shows that expected collateral values and probabilities of real estate crises may be distorted, this way leading to more lending and hence to a higher demand for real estate and higher property prices. There is evidence for a mutual relationship of these two markets rather than for one market leading the other. However, turning points and structural breaks tend to occur when valuation divergences become increasingly apparent to investors and lenders.