Interest rates increase the cost of financing. This means that given the same monthly budget, you're still going to spend your whole budget. You get less house for the same amount of money. The difference is that the money goes to the bank instead of the previous owner. At some point housing prices do drop, but the reality is that demand exceeds supply. The problem isn't financing itself. Places with supply exceeding demand massively benefit from cheaper financing as it makes the cost of living smaller.