Housing market dynamics : on the contribution of income shocks and credit constraints This paper presents a dynamic theory of housing market fluctuations. It develops a life cycle model where households are heteroeneous with respect to income and preferences and mortgage lending is restricted by a down payment requirement. The market interaction of young credit constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit constrainded households affects housing prices independentlyof aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over react to income shocks. (4) A relation of the down payment constraint triggers a boom bust cycle. These results are consistent with patterns observed in the US and the UK.