High mortgage debts leave homeowners vulnerable to economic shocks

29 September 2016

Research has shown homeowners took on more debt as house prices rose between 2001 and 2012.

A series of stacked coins on a table beside a graphic of a house, indicating rising household debt. Image: iStock

Households servicing already high levels of household debt have taken on even more as house prices have risen. Image: iStock 

A $1,000 increase in house value is associated with a $240 increase in household debt among property owners, University of Sydney research has found.

A study of over a decade’s worth of household level data suggests Australians are accumulating debt as house prices rise, exposing homeowners to economic shocks.

Researchers from the University’s School of Economics 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 authors of the study found increases in Australian house prices may lead households to refinance an existing mortgage or change the composition of debt already held. Moreover, the responsiveness of household debt to house prices is greater among households with higher levels of indebtedness.

Increasing household debt has widespread implications for the Australian economy, note study authors Professor Garry Barrett, Dr Kadir Atalay and Dr Rebecca Edwards from the University of Sydney, who conducted the research for the Australian Housing and Urban Research Institute (AHURI).

What happens if interest rates rise or house prices fall? 

“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,” said co-author Dr Kadir Atalay.

“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.”

How mortgages affect working lives

Australian households are taking on extra debt in response to rising house prices at a higher rate than that found in studies in the United States and the United Kingdom, said Professor Garry Barrett.

Co-author Dr Rebecca Edwards said the data show households also adjust their labour supply 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. Conversely, older single women appear to use the additional housing wealth to retire early,” said Dr Edwards.