This project broadens the research around housing and labour supply by addressing the work incentive implications of rising real house values and the fungibility of assets following mortgage innovation and deregulation.

  • Project dates: 2016

The employment activities of a nation’s adult population are a key driver of economic growth. A falling employment participation rate in the adult population will lower per capita GDP, all else unchanged. Population ageing therefore prompts fears of an enduring economic slowdown because employment participation rates are much lower past retirement age.

This concern is amplified if welfare programmes blunt work incentives and depress labour supply from the working age population. A series of Commonwealth Reports (Reference Group on Welfare Reform, 2000; Productivity Commission, 2013; Australian Government Treasury, 2010) have signalled the growing importance of this policy issue.

Recent policy initiatives aimed at lifting employment participation include increasing the age at which aged pensions are payable to 70 (in 2035) (Commonwealth of Australia, 2014). Meanwhile younger income support recipients are subject to tightening eligibility rules that accompany welfare reform measures. They currently make it mandatory for young job-seekers (in select areas) to participate in Work for the Dole programs to become eligible for income support (Department of Employment, 2014).

Housing and housing assistance programs play a potentially important role in driving employment participation decisions, yet they rarely feature prominently in policy debates, and we lack an evidence base upon which to base reform initiatives.

There are at least four ways in which employment participation can be impacted by housing circumstances:

  1. Housing assistance programmes such as Commonwealth Rent Assistance (CRA) and rent rebates in public housing blunt work incentives by raising the proportion of earnings that are replaced when not working (the replacement ratio). This is the link that attracts most attention, and where we have some evidence (Whelan, 2004;, Dockery et. al 2008; and Dockery et al., 2011). The proposed project will extend this programme of research by using micro-simulation and econometric modelling techniques to compare the effect that housing assistance programs have (compared to other welfare programmes) on work incentives and employment participation to inform the design of policy reforms that can give the ‘biggest bang for a buck’ in terms of lifting employment rates.
  1. Since the mid-1990s, increasing real housing prices have left many baby boomers with a large ‘nest egg’ of accumulated housing wealth that can buffer lower incomes following early retirement. Whether early disengagement from the workforce has actually been encouraged by this ‘nest egg’ effect is uncertain, but speculation about its presence has grown in recent years. We know very little about this phenomenon, but its potential importance is a motivation for our proposed use of novel latent class modelling approaches to estimate housing wealth’s impact on employment participation in the later stages of labour market careers.
  1. Many home owners have been tempted to raid these ‘nest eggs’ as rising real house prices has also been accompanied by mortgage innovation that allow mortgagors to cash in housing equity by adding to existing mortgages (Parkinson et al. 2009, Lowe, 2011). Housing wealth is now more fungible than ever before; instead of conserving or even accumulating housing equity, growing numbers of baby boomers are approaching retirement with large outstanding mortgage debts. This equity withdrawal is in part responsible for a 44 per cent increase (from 27 per cent in 1982 to 39 per cent in 2009) in the proportion of 55-64 year old Australians with outstanding mortgage debt (Wood, Ong and Cigdem, forthcoming). Moreover, those in this age group with mortgages are more leveraged than ever before, with loan-value ratios increasing from 22 per cent in 1990 to 28 per cent in 2009 (Wood, Ong and Cigdem, op cit). The labour market consequences of this growing indebtedness are very different from ‘nest egg’ effects. Heavily indebted baby boomers may be banking on extending work careers well beyond pension age. Alternatively, they could be relying on superannuation lump sums to pay off accumulated debts. There is once more a dearth of evidence surrounding the work plans of this group; the latent class modelling described below will use panel data on labour market careers unfolding over the 2001-10 period to empirically examine these ideas. While impacts on employment participation are the focus of our empirics, it is important that we keep in mind possibly significant wellbeing and social policy implications. Those approaching pension age with outstanding mortgages might well be expecting to extend work careers, but the hazards posed by unexpected episodes of ill-health and age discrimination in labour markets might thwart such plans. The release of superannuation lump sums to pay off mortgages might be forced on those prone to these hazards. The age pension is a welfare safety net but if these risks turn out to be widespread there are costly implications for government budgets. This wider concern is another motivation for the empirical work proposed in this project.
  1. Large bequests and even gifts are yet another consequence of booming real house prices. We estimate that 1,839,619 persons in the Australian population received an inheritance/bequest at least once between 2002-12; they average $82,942.4, or 1.3 times average annual gross earnings in 2012. The economics literature has explored how the expectation and receipt of bequests weakens savings motives (Engelhardt and Mayer, 1998), and lifts consumption (Joulfaian and Wilhelm, 1994). After all, why bother curbing the urge to spend in order to (say) save a deposit for home purchase, if gifts or bequests from parents will cover the deposit required in order to purchase a home? There is of course an additional possible effect on work effort. Why strive to meet employment goals such as promotion by (say) working harder, acquiring additional qualifications/training, if the higher incomes resulting from more study/work effort are unnecessary in meeting discretionary spending plans? A propensity score matching methodology will be used to explore these possible employment and training impacts (see Wood and Cigdem (2012) for its application).


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Brown, Sarah, Robert Durand, Mark N Harris and Tim Weterings. 2014. “Modelling financial satisfaction across life stages: a latent class approach.” Bankwest Curtin Economics Centre Working Paper 14/3, Perth: Curtin University.

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Department of Employment (2014), Work for the Dole in Selected Areas-locations, Retrieved on 15 August, 2014 from

Dockery, A.M. and Ong, R. and Wood, G. (2008). Measuring work disincentives: Taxes, benefits and the transition into employment. Australian Journal of Labour Economics. 14 (3): pp. 265-288.

Dockery, A.M., Feeny, S., Hulse, K., Ong, R., Saugeres, L., Spong, H., Whelan, S. and Wood, G. (2008). Housing Assistance and Economic Participation, Final Research Paper for National Research Venture 1: Housing Assistance and Economic Participation, Australian Housing and Urban Research Institute, Melbourne.

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Parkinson, S, Searle, BA, Smith, S, Stoakes, A & Wood, G 2009, ‘Mortgage equity withdrawal in Australia and Britain: Toward a wealth-fare state?, European Journal of Housing Policy, vol. 9, no. 4, pp.365–89

Productivity Commission (2013), An Ageing Australia: Preparing for the Future, (Research Paper), Commonwealth of Australia, Canberra.

Reference Group on Welfare Reform (2000), Participation Support for a more Equitable Society, Final Report of the Reference Group (the McClure Report), July.

Whelan, S. (2004) An analysis of the determinants of the labour market activities of housing assistance recipients, AHURI Final Report No. 070. Melbourne : Australian Housing and Urban Research Institute

Wood, G. and Cigdem, M. (2012) Cost-effective methods for evaluation of Neighbourhood Renewal programs, AHURI Final Report No.198. Melbourne: Australian Housing and Urban Research Institute.

Wood, G. and Ong, R. (2013), ‘When and why do landlords retain property investments?’, Urban Studies, Published online before print, doi:10.1177/0042098013484544.

Wood, G. Watson, R. and Flatau, P. (2006), ‘Microsimulation Modelling of Tenure Choice and Grants to Promote Homeownership.’ The Australian Economic Review, Vol.39, No.1, pp.14-34.

Wood, G., Forbes, M. and Gibb, K. ‘Direct Subsidies and Housing Affordability in Australian Private Rental Markets.’ Environment and Planning: Government and Policy, Vol.23, No.5, pp.759-83, 2005.

Wood, G., Ong, R. and McMurray, C. (2011) The impacts of the Henry Review recommendations on the private rental market – Savings income discount and rent assistance. Final Report No. 175, Australian Housing and Urban Research Institute, Melbourne.

Wood, G., Ong, R., and Cigdem, M. (Forthcoming), Housing Affordability Dynamics in Australia: New Insights from the Last Decade, AHURI Final Report, Melbourne: Australian Housing and Urban Research Institute.

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