Individual Investors' Housing Income and Interest Rates Fluctuations

Abstract

We study the relationship between interest rates and the decision to invest in rental
properties. Using unique tax filing data from Australia, we show that declines in interest
rates between 2006 and 2019 coincide with a substantial increase in the share of landlords,
driven by middle-income retirement-age individuals. Empirical tests, field surveys, and
results from a quantitative portfolio model point to reaching-for-income as the mechanism.
Retirees favor consuming from income payments, rather than liquidating wealth. As
rates decline, they substitute interest income with rental income. This behavior impacts
homeownership rates and retirees’ exposure to local shocks.

Keywords: Household Income, Interest Rates, Landlords, House Prices, Rents

JEL Classification: D1, R21, E43