How housing bubbles destroy productivity

By Leith van Onselen

The Australian Housing and Urban Research Institute (AHURI) has released a new report exploring “the nature and magnitude of the relationship between house prices, household debt and the labour market decisions of Australian households”, which paints a sobering picture for the economy and financial stability.

The key conclusion from the report is that “households accumulate debt as house prices increase, leaving them vulnerable to housing and labour market shocks. House price increases also potentially promote or dampen labour supply and labour force productivity”. In other words, Australia’s housing bubble is distorting the economy.

The report notes that Aussie home owners tend to borrow more as their home’s value increases, and that this ‘wealth effect’ is greater than in the US or UK:

Overall, the results indicate that a $1,000 increase in housing wealth is associated with an increase in debt of approximately $240 per annum. This is a large response compared to the magnitudes found in studies in the United States and United Kingdom…

House price increases are associated with larger increases in total indebtedness for home owners with higher initial loan-to-value (LTV) ratios. Home owners with larger values of non-mortgage debt as well as higher LTV ratios are more sensitive to house price movements compared to other home owners…

The take-up of further mortgage debt among vulnerable highly leveraged households exposes them to income, housing and financial market shocks. The results are in contrast to the general belief in Australia that debt is held by those most able to service it—higher income and high-wealth households. Macroeconomic policy-makers should interpret high levels of debt and rising household debt-to-income ratios in Australia carefully.

Overall, the findings show that house price changes influence household debt through two channels: a direct wealth effect and an indirect collateral effect via the household’s borrowing capacity. That is, some households face borrowing constraints and, for these households, rising house prices increase the value of their property that may be used as security for a loan and thereby loosen the borrowing constraints…

Our results indicate that in response to increasing house prices, some home owners, especially home owners with low debt, engage in debt financing of consumption (involving extracting equity from their home). Other home owners, especially those with relatively high debt levels refinance existing mortgages or adjust existing debt portfolios.

The report also found that rising house prices dampens labour force participation and hours worked, thus presenting a downside for the economy as productive workers withdraw from the labour market, as well as making it more difficult to counteract the impacts of an aging population:

The most important responses are in labour participation and hours of work by women, both partnered and single. The effect is strongest among the older cohort of women and is associated with early retirement for those experiencing above average housing wealth gains.

Younger partnered men and women exhibit a reduction in hours of work in response to the gain in housing wealth. That is, these gains in wealth effectively fund time away from work to undertake non-market activities such as providing household care for children, ageing parents, undertaking volunteer work or enjoying more leisure.

AHURI notes that its findings have important policy implications for macroeconomic stability:

The take-up of further mortgage debt among highly leveraged households exposes those households to the risk of significant loss if house prices fall or if interest rates rise. This, in turn, may pose a systemic risk for the macroeconomy.

An economic shock, emanating in either financial, labour or housing markets, may lead to widespread defaults that would cause the shock to spread across markets and threaten the performance of the aggregate economy.

Therefore, policy-makers may need to consider limits on, or regulate the risks associated with, the continued collateralisation of debt in a potential deflationary environment.

There are also implications for retirement incomes:

The analysis reveals that higher house price growth is associated with early retirement for women (though not for men). Consequently, public policies that contribute to house price growth can induce earlier retirement among home owners, particularly if equity withdrawal to fund consumption is facilitated.

As well as implications for labour force participation and productivity:

Productivity growth is the foundation of sustained improvements in the standard of living and hence represents a prime concern of policy-makers. The results of the research presented in this report highlight two ways in which housing and housing finance-related policies might influence productivity growth.

First, results indicate that housing policies can play a potentially important role in driving labour market participation decisions in Australia, and hence should be considered in conjunction with other labour market policies to encourage employment participation…

Second, as house price growth tends to affect labour supply, while simultaneously making it more difficult for renters to become home owners, policies that dampen house price inflation (e.g. new housing supply) may also contribute to labour force productivity growth.

And that’s why Australian multi-factor productivity stopped growing at the turn of the millennium.

The full report can be found here.

Unconventional Economist


  1. Jumping jack flash

    ” In other words, Australia’s housing bubble is distorting the economy.”
    It IS the economy.

    But seriously, it is a matter of perspective. For every loser taking on a debt mountain and struggling to pay it off and reducing their consumption to do so, there is a winner somewhere who receives that debt mountain straight into their bank account and increases their consumption. Maybe not always living in this country these days.

    It, theoretically, should even itself out. But in reality, the people with houseloads of debt in their banks probably don’t go on massive spending sprees at Harvey Norman and JB HiFi, maybe a few do, but most possibly spend their debt windfall intelligently on things like renovations so they can use the debt to generate more debt as equity, later on.

    And sure, the person receiving the debt mountain doesn’t need to work as hard anymore because they suddenly have a houseload of someone else’s debt in their bank. Instant riches for virtually no effort! But that’s just life, and luck, and playing the new FIRE economy game the right way. Like Aussie John did. He’s a winner.

    • …unless the winner uses that ‘windfall’ debt mountain to borrow an even bigger debt mountain, further up ‘the ladder’! Or worse, uses it to buy many debt mountains, based on the equity that the several deposits will allow them to leverage up…..
      Not everyone is downsizing or cashing in.

    • Its not a zero sum game because the ever increasing house prices are due to ever increasing loan size, which is new money creation

      not just shuffling money from one person to another

      • yes new debt, but each $9 aus debt will only fund 1$ GDP.
        Main beneficiary is a bank.
        In China $6 debt fund $! GDP
        and in USA 3$ funds $1 GDP

    • That’s why Chinese living standards have increased exponentially over the last three decades.
      Of course the paper ignores the real devil in all this – INTEREST RATES This aspect that is totally ignored by everyone.

      Our ever lower lower lower interest rates result in over-consumption which results in this debt. Now part of the price of those over-consumed goods is the labour and other economic input be it here or in China – think global macro for a moment.
      The other part cost (not price) of those goods that we ignore is the raw material we dig up from our earth and the damage we do to its environment – costs that, on a macro scale, we totally ignore!!!!!!! The raw materials will not be available to those who follow us and we will live them an environment that is hell to live in.

      I know this concept is very foreign to those with a modern version of money in their head – you know the one where money is just some artificial construct that exists in a world of its own. However the facts are that money gives the right to resources – a fact which one would think these modern economic academic geniuses would tune into with China buying up resources world wide – especially businesses mines farms and houses in Australia. But no!!! Just argue we need to print more to lower the rates!!!

  2. Productivity took a hit when people placed more emphasis on their image than on their value, like Reusa, here, and now in the era of AI robotics we find people have very little value at all.
    Sco Mo told the world the Govt is out of levers to keep the image side of the equation going, and I see the elephant of 19 applicatnts for every vacant position, is about to trample on self image.
    By every metric the nation is rooted.
    This is the end of capitalism in Straya Mate

  3. Borrowing or selling your assets to finance consumption allows you to have more in the short-term but less in the long-term.
    You get less in the long-term since you must pay interest on your borrowings and no longer have the benefit/income of the asset you sold.

    Australia on net is selling assets to foreigners and borrowing from foreigners. Much of the borrowing is used directly to buy existing houses of other Australians. Indirectly the borrowing is then used by the [house-selling] Australians to buy foreign-made goods.

    In the long-term Australians will be worse off as a result of the asset sales and borrowing. The turning point will be when foreigners substantially reduce their lending and asset buying.

  4. I don’t disagree with your analysis my only critique being that any society that needs to be reminded of the direct relationship between real productivity increases and real wealth creation is probably beyond redemption. For me it is beyond doubt that Australians have made a deliberate decision walk (no run) this self destructive path, they don’t need to be told how destructive this is for any society because all any Aussie wants to know is, how can I come out of this better off than my neighbor? Everyone accepts the zero-sum nature of the game, weird thing for me is the moralizing that accompanies this deliberate theft. Make no mistake about it the rich are robbing the poor (and the state) while the Aussie middle class are rewarded with table scraps for their complicity.
    The middle class cant win this game, the poor definitely cant win this game and the rich could give a RA. welcome to utopia Australia style.

    • Life is now so complicated that people are detached from reality and it is extremely hard to know the overall consequences of one’s choices and also the value of one’s contribution.

      If a doctor is paid more than a plumber and a kid can get a gig as a doctor, then he will go for it. Why not? Being paid so much is an indication of the value of the service isn’t it?
      If a mortgage broker gets even more dollars, shouldn’t the doctor quit and do that instead? Why not? Where is the obvious difference?

      If a young accountant gets paid $200 to help granny do her tax is this a good thing? What if the accountant finds he can earn $1000 by restructuring granny’s tax affairs to be more tax efficient? Still a good thing?

      • What if a Bank ( or banker ) goes all in on property lending, driving a bubble that pops, and then influences Government for a tax payer funded bailout, that saves his bonus…. isin’t that a good thing. Fat profits and no risk. Thats why the banks attract the smartest.

    • “Make no mistake about it the rich are robbing the poor (and the state) while the Aussie middle class are rewarded with table scraps for their complicity.
      “The middle class cant win this game, the poor definitely cant win this game and the rich could give a RA. welcome to utopia Australia style.”
      Spot on CB. Like I said about your past posts, I had come to realise that you weren’t approving what is happening, only that it is what our society has become and couldn’t care less. I suppose the best we can do is to point out the long term consequences without getting angry, and try to look after ourselves and those close to us as best we can. I tell every young, talented person to leave and only come back if there’s a dramatic change, and I can’t see that happening for a very long time, if ever, and only after a big and prolonged shock, which I can’t see happening yet. This frog is going to boil – slowly.

    • Did you see the Howard on Menzies doco? Really showed how bipartisan support for home ownership was a cornerstone of establishing postwar middle Australia, also known as Menzies’ “forgotten people”.

      For all the delusional conservative claptrap about “making your own luck” the fact is middle Australia only came into existence thanks to government policies dedicated to home ownership, full employment and investment in all levels of education.

      And Menzies, being a conservative and a great Liberal PM always ran budget surpluses, right? Actually the Menzies Government ran deficits so that the government could invest in capacity building infrastructure projects and expand university education beyond the rich kids via the Commonwealth Scholarship scheme.

      Looking at what has happened to home ownership and education thanks to market forces, I can only conclude we need to head back to more government intervention.

    • From April this year …

      Real estate in Tweed Heads, Bowral, Bendigo more expensive than in New York | NT News

      … extract …


      Meanwhile, in North America, many housing markets remain “affordable or nearly affordable,” according to Mr Pavletich.

      One reason for this is a liberal land use policy, with many markets employing “light-handed” zoning regulations and some, such as Texas, installing near deregulation.

      In Houston, housing affordability is 3.5, with median income at $80,177 and median house price $280,458.

      In Dallas, it’s 3.4, with median income $79,540 and median house price $271,067.

      Mr Pavletich believes this success is down to the fact that states like Texas “do not allow local authorities to control the supply of land.” This means “developers can respond quickly to market changes and supply when needed.”

      A large part of Australia’s housing problem is down to urban containment or consolidation policies, he claims. … read more via hyperlink above …

      … and September last year from the UK Telegraph …

      The real ticking time bomb for the Tories is home ownership – Telegraph

      Check out my archival website PERFORMANCE URBAN PLANNING for progress obn these issues in New Zealand …

      • Mr Pavletich believes this success is down to the fact that states like Texas “do not allow local authorities to control the supply of land.” This means “developers can respond quickly to market changes and supply when needed.”

        SO?? go and build madly 3 hours travel from employment, what GOOD is that?? Stupid.

        Long term issue is that Town Planning hunts employment out and far away from residential areas so forming hideous dead dormitory suburbs and miserable lives in the majority. Stupidly stating Aus needs more land freed up to build nasty houses on small blocks of land out to buggery is NOT the answer for happy functioning country. Nor the previous scream, to be able to take good and near work land build rubbish dog box towers, with substandard specifications, sold to chinese speculators money parking as allowed by Govt failing to pass Anti Money Laundering Bill by Property, and before that these dog boxes were said to provide for the oldies to huddle in, selling off homes and gardens to developers…not on mate.

        I remember when Blues Point Towers on the foreshore was built, adjacent on the water was a small sawmill with timber coming by water, and a yacht builder, both surrounded by green lawn to the water. Wonderful to see real work in the city. Council etc got rid of them, leaving deadness.

  5. boomengineeringMEMBER

    My years of rantings of high house prices destroys jobs because no money to buy stuff if all goes to mortgage has always fallen on deaf ears. Next step is no jobs to pay for mortgage because no one buying stuff sold or made.The profiteers don’t make up the short fall.

    • I’m in the same boat. Years of saving money to buy a house = very little money went on discretionary spending.
      Now paying a massive mortgage = very little money going into discretionary spending.

    • I agree with you.
      ‘Younger partnered men and women exhibit a reduction in hours of work in response to the gain in housing wealth. That is, these gains in wealth effectively fund time away from work to undertake non-market activities such as providing household care for children, ageing parents, undertaking volunteer work or enjoying more leisure’

      And the study thought this was a BAD thing??? that not being so desperate for dollar meant people could get life, care for their kids and aged parents. So concern that people were escaping the treadmill and not adding profits of employers???? nasty.

  6. Not smart country or Lucky country DUMB country. Love affair with real estate has sucked the life blood and intelligence away. When tradies represent the cashed up elite your in a bad way. Sure the wealthy have cashed in as well but the smart money will always go where the money is. Real Estate not true wealth. Building large enterprises is building wealth and we do not do that well in Australia.

    • People might try to build start-ups if they were given the opportunity.

      No bank will lend to a start-up though, and certainly no where near the same rate as a suburban home-loan.

      • Brother of mine had a good business and was looking to expand i.e. double his employees. The Unions got involved and that was the end of that. His turnover would have doubled but his costs with the unions demands being met would have taken all the extra profit and them some away. Solution he sold business for tidy profit and moved on. They say we need unions but not at the expense of building our businesses. Nasty pricks they are as well.

  7. I would have thought the biggest reason a housing bubble leads to weak productivity is through the enormous amount of investment which gets redirected into housing construction. Which does almost nothing to boost labour and capital productivity. Similar to the way additional mining investment led to weak productivity as investment in less productive mines crowded out other investment.
    Then when it bursts, productivity stays weak because the credit market is broken so productive investment can’t get off the ground.
    It is the dumbest policy all round.

  8. There’s certainly going to be a lot of “productivity” in the legal profession when this mass lunacy on the East Coast is over. In fact if I was a bankruptcy professional I would be seriously rubbing my hands looking at all those condos being built and lenders getting cold feet as well as the loan sharks circling, offering “alternate” finance at up to 15%. This is not going to end well!

  9. Austasia- fast becoming another overpopulated Asian metropolis. Its better here for them but getting worse for us. At what point will the majority of citizens realise the damage being done and start to stamp their feet and say enough is enough. Our precious way of life will be gone forever unless prompt action is taken to restore social values above economic values. What a disaster in the making.

    • Careful, thinking that way is un Australian and racist. Remember you are not allowed to have a say in what happens in your country. Because its not your country anymore. Its the plaything of plutocrats and politicians and the new foreign overlords that have come to enslave your children into a life time of menial servitude.

    • “Austasia- fast becoming another overpopulated Asian metropolis” Australia might be becoming overpopulated but it is still lacking in culture and activity compared to Asia. Have you been to any major city in Asia? COMPLETELY different vibe and energy. Actually Asian metropolises are not too bad to live in.

      • Thanks for your reply. Been to Tokyo (2016 World’s most liveable city, and yes there is more than 1 world’s most liveable city in 2016), Shanghai, HK, Bangkok, Singapore, Guangzhou, Shenzen, Jakarta. Apart from a 2-3 days stopover they don’t do much for me. Too hot, too crowded, too much concrete, too much pollution.

  10. The lost perception is ” In order to be productive we need houses to live in, ….not being productive for the sake of owning a house”…..The world is really upside down at the moment (Long live TRUMP 🙂 🙂 )

  11. Just came from a Bill Evans Westpac presentation – his solution – ramp up immigration, “services” and infrastructure spending – aka kick the can.

    That is ScoMo’s solution too – this will be the next roll of the dice……..

    • Technically he’s not wrong though. Look at how this country measures success, it’s solely GDP, no one gives a crap about GDP per capita or GNI.

  12. SHANE OLIVER: Here’s what could spark a housing market collapse in Australia | Business Insider

    Australian house prices are expensive on almost every metric. Check.

    Australian households are heavily indebted compared to global standards. Check.

    Australia is building a lot of apartments right now, the highest number on record. Check.

    Combined, those factors have Australia’s housing bears growling loudly, seen as a potent and damaging cocktail that will eventually lead to a collapse in house prices. … read more via hyperlink above …