The relationship between intergenerational transfers, housing and economic outcomes

Abstract

As house prices in Australia have increased, concern has been expressed about the ability of young Australians to attain home ownership. In August 2014, for example, the proportion of all mortgage financed dwelling transactions that were purchased by first home buyers was approximately 11.8 per cent, the lowest share since statistics began being collected in the early 1990s. Anecdotal evidence suggests that one means by which home ownership is facilitated is through intergenerational transfers from parents to their children. While International evidence indicates that home ownership is positively associated with inter vivos transfers and bequests, there is little Australian evidence about this relationship. This research addresses three distinct but related questions around intergenerational transfers (inter vivos gifts and bequests), housing outcomes, and related economic outcomes. 1. What is the magnitude and nature of bequests and what role do they play in facilitating home ownership, changes in housing consumption or assisting home-buying households into outright home ownership? 2. What is the nature of inter vivos (financial and in-kind) transfers from older Australians to their children and what role do they play in facilitating sustainable housing outcomes? 3. What are the implications of intergenerational transfers for inequality and what are the likely consequences over time? The attainment of home ownership has significance beyond the strong ethos associated with it in the Australian social context. Home ownership has traditionally represented an important vehicle for accumulating savings and wealth. Moreover, the tax and transfer system has features that encourage individuals and households to accumulate housing wealth. Over time, if younger Australians were to be excluded from the housing market; there could be important implications for the accumulation of wealth and, in turn, impact on the sustainability of tax and transfer programs. More generally, inequalities in the generation and distribution of wealth may arise if some groups are systemically excluded from housing markets. If intergenerational transfers are important for housing careers this has important implications on a number of economic, social and policy dimensions. First, intergenerational transfers may be confined to households that are relatively wealthy. Transfers will then have the potential to exacerbate existing inequalities over time. In addition, a well-defined tax system generally attempts to achieve vertical equity, a goal that is achieved when those who have a higher capacity to pay contribute more in the form of higher taxes. If intergenerational transfers are an important means to accumulate wealth, their tax treatment becomes an important question. Existing literature that examines the relationship between intergenerational transfers and housing outcomes offer mixed evidence. It is important to emphasise that the evidence is largely international in nature and reflects the institutional and social context in which transfers occurs. Hence, the findings are not necessarily directly relevant to the Australian context. Notwithstanding this, it is clear that across many countries parents make transfers to their children on a regular basis. In the United States, there is evidence that such transfers are often tied to home ownership decisions. In the case of Europe, the evidence is more mixed. While some research indicates a close relationship between intergenerational transfers and housing outcomes in Italy, for example, the evidence is less compelling in some Nordic countries such as Denmark. For Australia, there is only limited evidence available on how intergenerational transfers are associated with housing outcomes. One study, for example, found that around 5.5 per cent of individuals report receiving assistance to purchase a home in the previous 10 years. The framework in this research is economic in nature. While somewhat stylised, the methodology facilitates the analysis of behaviours across a range of dimensions. For example, intergenerational transfers may influence both the quantity and timing of home ownership along with related behaviours such as savings. The economic approach provides a structured way to analysing these and related outcomes. The empirical analysis uses the Household, Income and Labour Dynamics in Australia (HILDA) dataset, a longitudinal database that contains a rich array of individual and household level information on key demographic, labour market and housing market measures; it also provides information on individuals' family background, such as parents' labour market and occupational status and parents' educational attainment. A key benefit of the HILDA data is that its longitudinal nature allows the use of well-developed statistical methods to empirically model the relationships of interest in a robust manner. Descriptive analysis indicates that, on average, around 6 per cent of HILDA respondents reported receiving a parental gift/transfer in any given year between 2002-12, while approximately 1.4 per cent reported receiving a bequest. However, the magnitude of bequests are substantially larger: over the same period, the mean amount of bequests received was in the order of $80 000 while the amount of gifts/transfers amounted to around $9000. Tenure choice regression models were estimated via a probit model to determine the role that transfers play in influencing tenure choice. Preliminary results suggest that there is evidence that inter vivos transfers and bequests are important factors affecting tenure outcomes (home ownership with and without a mortgage). Probit regression estimates indicate that receipt of bequests in the previous 10 years increased the likelihood that individuals attained home ownership in wave 10-either with or without a mortgage or outright home ownership-by 2-4 percentage points. Preliminary findings also indicate that the chances of being observed in home ownership are positively related to the size of the bequest received. An average bequest of $85 000, for instance, is expected to increase the likelihood of being observed in home ownership by around 3.4 percentage points. On the other hand, model specifications that include the receipt of gifts or the value of gifts seem to be a less important influence on tenure status in wave 10. In general, there is no evidence that the receipt of a gift per se is associated with a higher probability that the individual is observed in home ownership. This may be due to the low value of gifts that are not intended to facilitate beneficiaries' entry into home ownership. There is, however, evidence of positive associations between the amount of gifts received and advancement in tenure status. Subsequent analysis will more rigorously analyse the data by exploiting the panel nature of HILDA by estimating models capturing the dynamic nature of transitions into home ownership. Greater comparability between transfer recipients and non-recipients can be achieved by using quasi-experimental techniques like the propensity score estimator, which deals with the nonrandom distribution of parental transfers. In addition, the role of transfers (inter vivos gifts and bequests) on the distribution of wealth in Australia will be analysed. The analysis seeks to inform policies designed to ensure the sustainability of housing outcomes over the life-cycle as individuals seek to enter home ownership for the first time or respond to other life-events that impact on tenure status. In addition, the analysis will provide insight into tax and transfer policies designed to facilitate home ownership and enhance social welfare.