International perspectives on homeownership and home equity extraction by senior households

Abstract

Purpose This paper links the literatures on the life-cycle hypothesis, homeownership, home equity and pensions. Empirically, the focus is on the EU and USA. The paper aims to explore the extent that seniors extract their home equity and discuss the financial instruments available for equity extraction. Design/methodology/approach The study uses data from the EU and USA to determine homeownership rates, house values and mortgage debt. With these values, the amount of seniors’ home equity is measured for each country. The usage of home equity extraction methods is reported and factors limiting their use are identified. Findings Seniors’ home equity is a substantial share of their total wealth. Estimates for 2013 are that their home equity equals about €5tn in the USA and over €8tn in large EU countries. The authors find that only a small share of seniors extracts their home equity. While there are supply side constraints in many countries, the evidence suggests that the cause of low extraction rates is the lack of demand. Various reasons for the lack of demand are discussed. Practical implications The increasing share of seniors in most countries’ population suggests that there will be increasing pressure on public pension systems. One among many options to address this issue is to impose a wealth test for eligibility, where wealth includes home equity. This study suggests that although home equity is substantial for many seniors, they are reluctant to access the funds. Originality/value The paper highlights the importance of home equity in the EU and USA and the factors that affect the primary methods of extraction.

Asset-based welfare: Is housing equity release a viable option for pensioners in Slovenia

“…The inheritance aspect is of crucial importance and needs to be addressed in a broader context which involves a deeper exploration of complex familial relations. At the basic theoretical level, it is assumed that if elderly households have many children, there is a greater likelihood that these would (financially or otherwise) take care of their parents in the event that such support is required (Haurin and Moulton, 2017). It is thus suggested that elderly people without children would more easily decide to trade off their property for a better pension, while those with children would be less likely to opt for equity release solutions.…”

The Market for Reverse Mortgages among Older Americans

“…In the US, home equity seniors aged 62 had a total of $7.54 trillion in Q1 2020 (National Reverse Mortgage Lenders Association (NRMLA) 2020). Home equity for seniors in large European countries exceeded eight trillion euros in 2013 according to Haurin and Moulton (2017). By comparison, the aggregate value of equity release products is much smaller.…”

“…Beginning in 2015, HECM borrowers must demonstrate the ability to pay ongoing property tax and insurance payments or have sufficient home equity to set aside funds to pay these expenses in an escrow-type account at the time of loan closing ). The primary barrier to obtaining a reverse mortgage is not poor credit or lack of income, but lack of sufficient home equity (Moulton et al 2017). Any existing mortgage debt on a home at the time of application for a reverse mortgage must be paid off with the proceeds of the reverse mortgage or in cash at closing.…”

“…This does not imply that high up-front costs might not be part of the equation for low demand, but it certainly does not seem to be the driving factor. In a survey of older homeowners who considered but did not originate a reverse mortgage, 26 percent indicated high costs being a factor behind their decision: the same proportion that indicated a desire to leave their home as a bequest as a reason for not taking a reverse mortgage (Moulton et al 2017).…”

The China Syndrome Affects Banks: The Credit Supply Channel of Foreign Import Competition

“…Importantly, the rise of credit to the construction sector we identify cannot be rationalized by the effect of Chinese imports on the demand of mortgages. Indeed, Barrot et al (2018) show that households' credit demand surges mainly via home equity extraction, whereas in Spain home equity extraction practices are virtually nonexistent (Haurin, 2017).…”