That is, in the eyes of the lenders, declining house prices diminish the quality of the borrowers' collateral, which effectively reduces the availability of credit to households that can be used to finance consumer purchases. This effect is another reason to be concerned about the possible consequences of greater-than-expected house price declines.
And, to my view, the creditconstraint channel provides a more credible link between house prices and consumer spending than does mortgage-equity withdrawal, a story about which I have previously expressed serious doubts (Mishkin, 2007b). Another significant risk to the outlook is that lending standards could tighten more than expected not only for mortgages but for other types of credit as well.