Evidence item

This paper argues that the rent increase is the equilibrium outcome of a shift in housing tenure demand interacting with an inelastic rental supply. A tightening lowers overall housing demand, which by itself pushes rents down. At the same time, it raises the cost of owning relative to renting for credit-constrained households, shifting housing demand toward renting. When owning and renting are sufficiently substitutable, this shift outweighs the contraction in housing demand. Because reallocating housing into rental use is costly, rental supply cannot expand enough to absorb the additional demand, and rents rise. The same mechanism explains why house prices and rents move in opposite directions after a tightening: the price of the housing asset falls as discount rates rise, while the price of its service flow rises as demand shifts toward renting.