REVERSE MORTGAGES: A TOOL TO IMPROVE LIVING STANDARDS OF THE ELDERLY? A EUROPEAN PERSPECTIVE

Transcription

1 REVERSE MORTGAGES: A TOOL TO IMPROVE LIVING STANDARDS OF THE ELDERLY? A EUROPEAN PERSPECTIVE Anna Cristina D ADDIO (OECD, Social Policy Division) ICPM-CRR Discussion Forum: Global Challenges to Retirement Security Boston, 6-8 June 2016

2 Outline Introduction Literature review Some facts on housing equity release schemes in Europe Effects from converting housing equity into annuity Conclusion 2

3 Home-ownership increased over time almost everywhere % of housing stock Mid 1980s Mid 1990s 2009 Source: updated from Andrews et al. (2011) as in OECD (2013) 3

4 Housing to income ratios have increased substantially over time Domestic capital +Housing/ to income ratios and Domestic K +other asset-based wealth to income ratios, 1970 and 2010, selected OECD countries Domestic capital + housing assets /national income ratios Domestic K + other assets / NIR 0 USA CAN JPN DEU GBR AUS FRA ITA OECD-8 Source: based on data in table 7 of Piketty and Zucman (2013) 4

5 Switzerland Netherlands Austria Germany Denmark Sweden Canada Portugal Belgium United Kingdom France OECD-27 Finland Czech rep. Luxembourg United States Estonia Italy Poland Chile Greece Australia Slovenia Iceland Norway Spain Hungary Slovak rep. The majority of the over-65s are home-owners in the OECD, but fewer at younger ages % over-65s who are Owner renter other 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: OECD (2013) and d Addio (2016) 5

6 Home ownership over the life-cycle OECD-EU-22 Australia Canada US Source: d Addio (2016) Source: d Addio (2016) 6

7 The weight of residential mortgages has increased in many EU countries Residential mortgage to household s disposable income ratio, 2003 to 2012, selected EU countries

8 Switzerland Sweden Netherlands Denmark Iceland Norway OECD24 Germany Austria Finland United Kingdom Greece Spain Portugal Luxembourg Hungary Belgium Ireland France Italy Czech Republic Slovenia Estonia Poland Slovak Republic Switzerland Netherlands Sweden Iceland Belgium Luxembourg Norway United Kingdom Denmark Finland Ireland France Portugal Germany Spain OECD24 Austria Estonia Italy Czech Republic Hungary Greece Poland Slovenia Slovak Republic % hh aged between 25 and % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% At younger ages fewer people are «outright owners» Outright owner Owner repays mortgage % hh aged 65 and above Outright owner Owner repays mortgage Source: d Addio (2016) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8

9 Home-owners may have an income advantage over renters % increase in incomes of the 65s+ including Imputed rents OECD24: 17.8% NLD CZE CHE PRT EST AUT FRA SVN SWE SVK ISL LUX NOR FIN BEL GBR POL DEU HUN ESP GRC ITA DNK IRL Source: d Addio (2016); see also OECD Pensions at a Glance (2013)

10 Net wealth for home owners is higher Net wealth for home-owners and nonowners, thousands of euros, year Mean, (/1,000) Home-owners Median, (/1,000) Nonowners Home-owners Nonowners Euro area Belgium Germany Greece Spain France Italy Luxembourg Netherlands Austria Portugal Slovenia Slovak republic Finland Source: d Addio (2016) based on data extracted from HFCS wave 1 10

11 People might release equity to get an additional stream of income (in old-age) Releasing housing equity Total sale Partial sale 11

12 A literature review: lack of decumulation among the elderly Absence of a significant relationship between changes in housing equity and whether the family has children (Venti and Wise [1989]). People tent to sell their house or move to a smaller one only after serious shocks such as illness or death of a spouse (Sheiner and Weil [1992]; Venti and Wise [2002]; Chiuri and Jappelli [2010]) and only after having decumulated financial wealth (Smith [1998]; Rosen and Wu [2004]; Berkowitz and Qiu [2006]; Cardak and Wilkins [2009]). Venti and Wise [1989] showed that the elderly in the US were as likely to move into a larger house as to move into a smaller one. (Cf. also Merrill [1984]; Feinstein and McFadden [1989]). 12

13 A literature review: lack of decumulation among the elderly /2 Despite being illiquid, housing wealth is often seen as a buffer stock, not as a tool to boost consumption (Venti and Wise [2004]). Market regulation and financial market development may also play a role. (Angelini, Brugiavini, and Weber [2009]; Chiuri and Jappelli [2010]) Increasing interest in financial literacy: being financially illiterate could help explaining the reluctance to use debt instruments or the failure to use them properly (Behram, Mitchell, Soo, Bravo [2010]). 13

14 The Market for Equity Release Schemes Development of housing and deregulation and innovation in financial markets have fuelled ERS in Europe, North America, Australia, and New Zealand (Springer, 1985; Leather, 1990; Jacobs, 1985; Wilson, 1988; Carter, 1985), younger cohorts, in particular, are increasingly willing to use equity release schemes in, for example, the United Kingdom (Smith, 2004), Australia (Ong et al., 2013a,b), and New Zealand (Davey, 2007). 14

15 The use and number of schemes vary widely across countries. Reifner et al. (2009a,b) find that in Europe the total worth of equity release mortgages was about EUR 3.31 billion with an estimated contracts in Yet they still accounted for only around 0.1% of Europe s overall mortgage market. In Australia, the number of loans under equity release schemes more than doubled between 2005 and 2011, 15

16 The market for ERSs substantial growth was also recorded in the United Kingdom between 1992 and 2011, both in value and number. New Zealand saw more than ERSrelated loans issued in 2006 for an overall value of NZD 227 million, twice as high as in the previous year. 16

17 Reverse mortgage market in the US 140,000 Number of Loans 120, ,000 80,000 60,000 40,000 20,000 - The size of the market is relatively small Source: data based on HECM statistics provided by the National Reverse Mortgage Lenders Association (NRMLA 17

18 Reverse mortgage: UK has the largest market in Europe Source: d Addio (2016) as in Equity Release Council report of Spring 2016

19 Source: d Addio (2016) based as in Equity Release Council reports 19

20 But the market for ERS is still very small in EU and data are scarce. Source: Reifner et al. (2009); see d Addio (2016) 20

21 REVERSE MORTGAGES AS A TOOL TO IMPROVE LIVING STANDARDS OF THE ELDERLY? 21

22 350, , , , , ,000 50,000 Housing wealth of the over-65s (based on SHARE, wave 5) 0 ES DK SE DE AT IT FR NL BE Source: d Addio et al. (2015) 22

23 Making 100% of housing equity liquid gives relatively high annuity. Average equity value, EUR 6,000 5,000 4,000 3,000 2,000 r=4% r=7% r=10% 1, , , , , , , , , ,257 ESP BEL ITA FRA DNK DEU NLD AUT SWE Median house value, EUR Source: d Addio et al. (2015) 23

24 A full conversion of house equity into annuity would contribute substantially to reduction of economic vulnerability. But it is unlikely Percentage reduction in vulnerability among 65+ in case of reverse mortgage (obs. weighted with household weights) 30% 25% ESP 20% BEL ITA 15% FRA DNK 10% DEU NLD 5% AUT SWE 0% r=4% r=7% r=10% releasing 70% of the housing wealth Large effects also with high interest rates. Source: d Addio et al. (2015) 24

25 Conclusion Reverse mortgage MAY be a powerful instrument to enhance living standards of the elderly but cannot replace retirement incomes Necessary to distinguish between decumulation and the use of such additional liquidity. Risk of wasting this wealth. But it could also be invested in productive activities (education, entrepreneurship). 25

26 Conclusion ERS often very expensive; Lack of information and scarce knowledge of the products; Lack of interest in decumulation Desire to stay in one s own home 26

27 Conclusion Home-ownership more concentrated in high-income households Could potentially increase income inequality in old-age Yet, for those who wish to release their home equity not being able to do so «optimally» produce inefficiencies in the system 27

28 Thank you! Pensions at a Glance 2015 OECD and G20 INDICATORS Published 1 December 2015 anna.daddio@oecd.org Web page: 28

29 References OECD (2013), Chapter 2 in OECD Pensions at a Glance 2013; d Addio (2016) «Housing wealth and the living standards of the elderly», forthcoming d Addio A.C., F., Coda Moscarola, M.C., Rossi and E., Fornero (2015) «Reverse mortgage: a tool to reduce old age poverty without sacrificing social inclusion» Chapter 21 in Börsch-Supan, Axel / Kneip, Thorsten / Litwin, Howard / Myck, Michal / Weber, Guglielmo «Ageing in Europe Supporting Policies for an Inclusive Society» (De Gruyter, 2015) 29