NEW YORK, NY – Despite the Federal Reserve holding interest rates at decades long high, inflation remains elevated. New research from Columbia Business School provides one explanation to this puzzle. The study shows that higher interest rates can drive up rents in U.S. housing markets. A 0.25 percentage point rise in the 30-year fixed mortgage rate leads to a 1.7% increase in real rents and a 1.4% increase in nominal rents. By increasing rents, higher interest rate inadvertently keeps inflation high.
The study, Monetary Policy and Rents, authored by Columbia Business School Professor Boaz Abramson, Pablo De Llanos of Columbia University, and Lu Han of the University of Wisconsin–Madison, finds that when interest rates rise, borrowing becomes more expensive, making it harder for many households—especially first-time and lower-income buyers—to purchase homes. As a result, more people stay in the rental market, increasing demand for rental housing and the upward pressure on rents. The increase in rents drives real estate investors, who are less sensitive to borrowing costs, to buy more homes and convert them into rentals. In the aftermath, the homeownership rate drops and rents increase.
“Rent is the single largest component of the consumer price index (CPI) and a key determinant of inflation. Our research shows that by increasing rents, interest rate hikes can unintentionally drive-up inflation,” said Boaz Abramson, Assistant Professor of Business. “Our findings also have important implication in terms of the distributional effects of monetary policy. Given that rent is the largest expenditure for most renters in the United States, monetary tightening disproportionately harms the most vulnerable populations, who tend to be renters. Higher interest rates can therefore deepen the housing insecurity crisis in the country.”
To conduct the analysis, the researchers developed a new rent-tracking tool called the ADH Repeat-Rent Index, which measures changes in rent prices over time. They compiled a dataset of more than 30 million rental listings from 2011 to 2022, covering over 5,000 ZIP codes across the United States. Using this data, they applied a statistical technique known as local projections to estimate how rents change in response to monetary policy shocks—specifically isolating unexpected changes in mortgage rates using high-frequency interest rate data. The results show that a 25 basis-point increase in the 30-year fixed mortgage rate leads to a 1.7% increase in real rents and a 1.4% increase in nominal rents within 24 months. These effects are most pronounced in the single-family rental market, where units closely resemble homes that potential buyers might otherwise purchase. The study also found that rentals were leased more quickly following interest rate hikes, suggesting stronger demand in the rental sector.
The study adds to a growing body of research examining how monetary policy affects different parts of the economy. While raising interest rates is a common tool for curbing inflation, the findings suggest it may have the opposite effect in the rental housing market—putting upward pressure on rents and contributing to inflation in the most significant component of household expenses.
Key Takeaways:
- Higher interest rates limit homeownership access – Rising mortgage rates make it harder for individuals—especially first-time and lower-income buyers—to purchase homes, increasing reliance on rental housing.
- Investor activity remains resilient – While individual homebuying declines after rate hikes, real estate investors continue acquiring properties and converting them into rentals, capitalizing on the higher rental yields.
- Rental markets respond quickly – Following interest rate increases, rental units—particularly single-family homes—are leased more quickly, suggesting stronger and more immediate demand for rentals.
To learn more about the cutting-edge research being conducted, please visit the Columbia Business School.
###
