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The Correlation between Rent and House Prices

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What happens with the housprices if the rent goes up?

Maybe you have heard it more often: 'If the rent increases, the house prices will decrease.' Is this true? And why is this?

What is Rent?

When people buy a home, most people will get a mortgage to pay for the house. 65,8% of the Americans own a home and 64,8% of all Americans have a mortgage. This means that 98,4% of all homeowners in the USA also have a mortgage. This mortgage ofcourse costs money, which is called rent. The rent is expressed in a percentage per year. In the USA the rent percentage in 2021 was for example 0,05% and now it is increasing. What does this mean for the house prices?

What happens when the Rent increases?

When the rent percentage increases, it means that you have to pay more interest per month to the bank for your mortgage. If your salary will stay the same, it means you can lend less money than before. The mortgage is more expansive and your income is the same so you will have less space to lend a high amount of money.

If this happens for everyone in the USA, then everyone can lend less money from the bank than before. What this means? Everyone has less money for a house = lower housing prices!

This could also be part of the reason why housing prices has risen so much in the former years, the rent has never been so low! Loans were bigger and people could lend more money to buy a home. People even said in this period 'Money is for free', because the costs (= rent) were almost zero.

The Perfect Formula doesn't exist

Thus, rent has a big influence on the housing prices, but there is ofcourse no perfect formula to calculate the exact correlation between housing prices and rent. As always, the world (of economics) is unpredictable, but it is clear there is a correlation between the height of the rent and the housing prices.

What do you think?

Let us know in the comments what you think about this theory and if you have experience with this theory in real life. For more blogs click here :)

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