Increasing house value can expose owners to “economic shocks”

The University of Sydney used a Household Income and Labour Dynamics in Australia (HILDA) dataset for 2001 to 2012 to explore the relationship between house prices, household debt and the labour market.

The research team found that increases in Australian house prices and wealth leads many households to adjust their labour supply, refinance existing mortgages or reallocate their current debt arrangement.

Australian households were therefore found to be “taking on extra debt in response to rising house prices” and that in particular, young partnered men and women reduced their hours of work in response to increases in housing wealth to spend time pursuing leisurely activities, while older, single women used the additional housing wealth to retire early.

The report noted that “the responsiveness of household debt to house prices is greater among households with higher levels of indebtedness” and that this increasing debt has “widespread implications for 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, in turn, poses a systemic risk for the macroeconomy,” said co-author Dr Kadir Atalay.

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

[Related: High household debt risky for banks: Moody’s]