Channels of Transmission: How Mortgage Rates Affect House Prices and Rents in Canada

We use Canadian data to examine how monetary policy affects house prices and the consumer price index for rent (CPI-rent) through exogenous changes in the mortgage interest rates. Nationwide, tighter monetary policy lowers house prices but raises CPI-rent, likely due to higher user costs for landlords or greater relative demand for rental housing. City-level analysis shows that, in response to tighter monetary policy, house prices fall most in cities where supply is inelastic, while CPI-rent tends to rise in cities with lower proportions of households moving from renting to owning.