Rising house prices mean more debt, less work: Report

by Phil McCarroll30 Sep 2016
Rising house prices in Australia are impacting household debt levels and labour participation rates according to research from the University of Sydney.

Research from the University’s School of Economics, based off the Household Income and Labour Dynamics in Australia (HILDA) dataset for 2001 to 2012, has revealed that rising house prices result in an increase in household debt levels and a decrease in labour participation.

The report, authored by Professor Garry Barrett, Dr Kadir Atalay and Dr Rebecca Edwards for the Australian Housing and Urban Research Institute (AHURI), shows that for every $1,000 house prices rise in Australia household debt levels increase $240.

The increase in household debt comes from households increasing their levels of mortgage debt. According to the report, the increase in mortgage debt is a result of Australians having to take out a larger mortgage to begin with or because owners withdraw the equity that has accumulated in their property.

The report claims Australian households are taking on extra debt in response to rising house prices at a higher rate than households in the United States and the United Kingdom. The take-up of extra mortgage debt is also likely to be among households that are already carrying high debt levels, which poses a potential risk to the Australian economy.

“The take-up of extra mortgage debt among highly leveraged households exposes them to the risk of significant loss if prices fall or if interest rates rise. This is, in turn, poses a systemic risk for the macroeconomy,” Dr Atalay said.

“An economic shock may lead to widespread defaults that would cause the shock to spread across markets and threaten the performance of Australia’s economy,” he said.

While debt levels rise in response to climbing house prices, it also appears Australians view rising prices as a method to increase their time outside of work.

“We find that young partnered men and women reduce their hours of work in response to increases in housing wealth, potentially increasing their leisure or time spent on caring activities,” Dr Edwards said.

“Conversely, older single women appear to use the additional housing wealth to retire early,” she said.