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Comment by topkai22 | Hacker News Reader

Rising interest rates drive up the mortgage rates. The vast majority of US home buyers have to finance their purchases, so an increase in mortgage rates is effectively an increase in the total cost of buying a house. The total cost of homeownership is correlated to rental markets, as we are talking about different ways of consuming the same good.

Interest rates have gone from 2.75 to 5.4%, meaning monthly payments on purchases have gone up almost 40%. Not all that will transfer to the rental market, but I be surprised if rents don’t continue to go up; barring a general collapse in house prices.

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That is not how rent prices work. It is pretty much supply and demand. No one cares how much your financing costs. If people start losing their jobs because the FED induces a recession, that means less money for rent. Younger folks move back in with their parents. People take on an extra roommate or two. Demand for rental units goes down. Prices go down.

If a significant fraction of landlords have financing costs that greatly exceed rental income, that is their problem. They can't just pass that cost on to renters because they feel like it.

The supply of housing for purchase directly competes with the supply of housing for rent. If you can get a 2 bed home for $1800/month as a renter or $1700/month to own, most people will choose to purchase, forcing landlords to lower prices. Similarly, if you can get $2500/month in rent for a property that costs $2100 a month to own and operate as an investment people and institutions will purchase or convert units to rental properties.

Yes, they aren't 100% interchangeable (down payment requirements and transaction costs can change the equation renting all things being equal ) and some markets (the bay area in particular) seem to have a bizarre separation in the cost of renting versus buying, but in general this holds true.

> If a significant fraction of landlords have financing costs that greatly exceed rental income, that is their problem. They can't just pass that cost on to renters because they feel like it.

Purely anecdotally, a large proportion of the housing available for sale in Plymouth (UK) seems to be rental property. Tenants are being thrown out while landlords sell up.

I have been wondering if the drive to cash out at a time when holding cash isn't necessarily such a great idea is exactly what you suggest - that those with buy-to-let mortgages are looking at the potential of interest rates rising faster than rents.

Yes - but mortgage interest rates are key component of house prices. In home purchases the buyer is typically constrained by the limit of what they can afford to pay monthly. Higher rates make that go higher putting downward pressure on housing.

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