Australians feel richer when the value of their homes rise, making it more like they will borrow even more and further expose them to potential economic shocks.
Researchers at the University of Sydney have found that a $1,000 increase in house value is associated with a $240 rise in household debt.
The authors of the study 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 study, conducted for the Australian Housing and Urban Research Institute, found that increases in house prices may lead households to refinance an existing mortgage or change the composition of debt already held.
“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,” says co-author Dr Kadir Atalay from university’s School of Economics.
“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.”
Australian households are taking on extra debt in response to rising house prices at a higher rate than that found in studies in the US and the UK.
Co-author Dr Rebecca Edwards says the data shows households also adjust how they work in response to higher housing prices.
“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,” she says.
“Conversely, older single women appear to use the additional housing wealth to retire early.”
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