This research analyses the link between house prices, mortgage debt, and labour market decisions of Australian households. It is well known that there is a positive relationship among house prices, household debt and labour supply, however empirical estimates of the magnitudes of this relationship in Australia are scarce.

Key findings are that there is a strong relationship between house prices changes and household indebtedness; there are important differences in the relationship between house prices and household indebtedness across demographic groups, and by level of debt holdings (e.g. the responsiveness of household debt to house prices is greater among households with higher levels of indebtedness); and house price movements have clear and consistent impacts on labour market activities. The magnitude of the effect varies by gender, family type and life-cycle stage (e.g. the effect is strongest among the older cohort and is associated with early retirement by those experiencing above average housing wealth gains).

The results show that the house price effect is largest at the upper part of the debt distribution and for middle-aged households. These households are then more vulnerable to future housing and labour market shocks, which, in turn, has implications for the adequacy of Australia’s retirement income system.