The relationship between intergenerational transfers, housing and economic outcomes

Abstract

Home ownership represents an important social and economic cornerstone of Australian society. In addition to providing security of tenure, ownership has represented an important savings vehicle by which Australians can accumulate wealth over the life-cycle. While aggregate home ownership rates have remained relatively stable over recent decades, this has masked the increasing challenge that some groups have experienced attaining this form of tenure. For example, there is evidence of later transition into home ownership and a lower likelihood of home ownership among middle-upper-income Australians aged 25-44 years. Other groups, such as low-income households, have also experienced declines in home ownership rates. The reasons for these developments are varied and reflect social and demographic changes that have tended to delay or curtail the attainment of ownership. In some cases, such as later partnering, this will tend to reduce home ownership rates in early parts of the life-cycle. There is also evidence, especially recently, that economic developments have impacted entry into home ownership. Rapid increases in the price of housing have been accompanied by historic low levels of first-time home buyers. Such developments have occurred against a backdrop of relatively low interest rates and a downturn in the economy following the GFC that was moderate compared to other countries. One pattern that has attracted increasing attention is the role of parental transfers in facilitating entry into the housing market. The evidence around the nature and magnitude of such transfers is, however, limited and the analysis in this report seeks to present evidence on this phenomena. In particular, the analysis will consider bequests and inter vivos transfers from parents to their children. In examining these intergenerational transfers, three specific questions are addressed: What is the nature of inter vivos transfers from older Australians to their children and what role do they play in facilitating sustainable housing outcomes?. What is the magnitude and nature of bequests and what role do they play in facilitating entry into the housing market?. What are the implications of intergenerational transfers for inequality and what are the likely consequences over time? The analytical approach in this report is economic in nature. That is, the analysis focuses on how the economic decisions and outcomes of individuals and households are affected by intergenerational transfers. The model of behaviour that motivates the analysis is one in which economic agents make utility maximising subject to the constraints they face. An intergenerational transfer can be characterised as relaxing the constraints faced by the recipients and in doing so present new opportunities for increased consumption, especially housing-related expenditures. Intergenerational transfers are also likely to have important implications for the distribution of wealth and the effect of this is considered in the empirical analysis. Existing literature on intergenerational transfers highlights the magnitude of such transfers across countries. Moreover, there is evidence, at least in an international context, that intergenerational transfers are used to facilitate and assist with entry into the housing market. The empirical evidence suggests that such transfers allow for entry into the housing market earlier than would be possible in the absence of the transfer, and relaxes the deposit or down payment constraint for first-time home buyers. Further, there is some evidence that intergenerational transfers tend to be inequality reducing reflecting the pattern whereby in a proportional sense, relatively wealthy recipients tend to receive less than their poorer counterparts. In Australia the evidence around the nature, extent and implications of intergenerational transfers is far more limited due, in part, to a paucity of data available for analysis. The first empirical analysis uses a Propensity Score Matching (PSM) methodology to identify the relationship between tenure outcomes in wave 10 of HILDA and the receipt of intergenerational transfers in the preceding nine waves of HILDA. The PSM methodology allows us to estimate the impact of a 'treatment', such as the receipt of a parental transfer or a bequest, on one group by comparing their outcomes to a control group comprising of persons who have never received a bequest, but who share a similar set of characteristics with the treatment sample. Its statistical appeal lies in its ability to identify a suitable control group in cases where a treatment is not randomly assigned. Bequests and parental transfers are non-randomly distributed across the population because there are personal characteristics that result in some individuals being more likely to receive these intergenerational transfers. For instance, it is conceivable that a person with a large number of siblings will have lower chances of receiving a parental gift or bequest as compared to a person who is an only child because their parents are less able to assist when there is a large number of children in a household. In this case, simply incorporating an indicator for receiving a transfer in a model of tenure outcome will produce biased estimates, as it will also capture the financial resourcefulness of one-child families and other unobservable factors that are correlated with receiving a bequest. The PSM methodology overcomes the challenge of non-random treatment by identifying a set of control observations that look similar to those which are treated, but which do not actually receive a treatment. The approach is termed 'quasi-experimental' as it provides a way of mimicking a randomised control trial where selection into a treatment is randomly assigned between control and treatment groups. The first step in the analysis involves identifying appropriate treatment and control groups. Analysis of the impact of bequests on the 'treated group' suggests that such transfers can have a marked impact on the likelihood of being observed in home ownership. The analysis indicates that receipt of a bequest increases home ownership rates among beneficiaries by between 4 and 8 percentage points. This impact is the effect of treatment (the receipt of a bequest) on the treated. Outright ownership is estimated to increase to be around 10 percentage points higher among bequest recipients compared to non-recipients among individuals aged 25-65 years of age. Though parental transfers or gifts tend to be smaller than bequests, large impacts of parental transfers on ownership rates are also identified. Such an outcome likely reflects the timing and purpose associated with inter vivos transfers. The analysis of first home ownership uses a duration or hazard rate approach. The analysis identifies a positive relationship between the receipt of intergenerational transfers and the hazard or conditional transition into home ownership tenure for the first time. In particular, for the sample of individuals the hazard or probability of transition into first home ownership is effectively doubled in the period in which a bequest is received. As a point of comparison, marriage more than triples the conditional probability of transitioning into first-time home ownership. For couples, it is the receipt of a bequest in the previous period that is positively associated with the transition into home ownership. In the case of parental transfers or gifts, large (>$5000) inter vivos transfers are positively associated with transition into home ownership. The lack of a significant effect for inter vivos transfers in general most likely reflects the large number of small non-housing related transfers of this nature reported. Regression analysis also indicates that recipients of transfers (bequests and inter vivos) purchase a higher priced house compared to first-time home buyers who do not receive a transfer of this nature. This suggests that intergenerational transfers impact on first home ownership on two dimensions: increasing the likelihood that the recipients transition into ownership and increasing the value of the housing purchased. The final empirical analysis examines how intergenerational transfers impact on the distribution of wealth. The level of wealth holdings for any given household are likely to depend on a range of factors such as age, human capital, tenure status and transfers received. The focus in this report is the role of transfers on the distribution of wealth and the methodological approach compares the actual distribution of wealth that is observed with the distribution of wealth that transfers in the form of bequests and inter vivos gifts not occurred. That is, a counterfactual or hypothetical wealth distribution is constructed on the basis of what would have happened if no inter vivos transfer or bequests had been received. Importantly, the methodological approach allows for other determinants of wealth, such as age, education and housing tenure to be controlled for when the counterfactual wealth distributions are calculated. A key advantage of the methodological approach is that the actual and counterfactual wealth distributions can be presented graphically. This is done using a series of density functions which indicate the likelihood or probability that households have a given level of wealth. The results point to two main findings. First, it is clear that renters are less likely to receive transfers compared to those in home ownership. Moreover, the transfers that did occur over the period 2001-10 tended to increase overall inequality. While the analysis is largely descriptive in nature, it does flag the potential for wealth to become increasingly concentrated over time and the important role that housing and housing tenure may play in such an outcome.