[drhagen]

Buying a house and renting an apartment are substitute goods, so falling home prices should lead to falling rents.

[nemo44x]

That's not true at all. Mortgages are based on a combination of interest rates and principal. This combination (plus taxes) create a monthly cost to purchase and live in a home. As interest rates go up, asking prices will go down so we end up at the same monthly price. Unless there's a big change in what people can afford per month.

Rent is based simply on what people that want to live in a property are willing/able to pay. Again, if there's a big change in what people can afford (lots of unemployment would drive down, inflation of wages would drive up) then rents will change. Otherwise they won't.

In the end, the price of a house going down as interest rates go up just means that the bank is getting more of the monthly payment.

[drhagen]

I stand by my original statement, which admittedly did not cover the complexity of what is going on in the market.

Falling home prices will cause falling rent prices, all else being equal. However, rising mortgage costs from higher interest rates will cause rising rent prices (also via substitution). Rising mortgage costs will directly cause home prices to fall, so the effect on rents will be somewhat mitigated. How much of the home price decrease that comes from mortgage costs versus other effects will determine what happens to rent prices.

As you say, if most of the decrease on home prices is caused by rises in interest rates, then it likely that rents will increase rather than decrease even if the direct effect of lower home prices would be to lower rents.

[AbrahamParangi]

But each day people make the decision to rent or buy and which they do is a function of how much each costs. While the mortgage doesn’t necessarily change the principal does and what we call housing prices is the price of houses people currently trying to sell. If rent is cheaper today it will depress housing prices today.