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Reverse Mortgages as Retirement Financing Instrument : An Option for “Asset-rich and Cash-poor†Singaporeans

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  • Ngee-Choon Chia

    (SCAPE)

  • Albert K C Tsui

Abstract

The unique way of financing housing through the mandatory savings system in Singapore has created a class of asset-rich and cash-poor Singaporeans. This paper provides a framework to assess the viability of a reverse mortgage (RM) market so that such instruments may be harnessed as a source of financing retirement income for home owners. Based on different cost of capital, we estimate the probability of loss for both the private supplier and public provider of RMs. The probability of loss is computed by three major components : choice of replacement ratio and property growth rate; forecast of cohort survival probability by joint-life; and generation of yield curves to discount the future cash flows. The stochastic forecast of survival probability is estimated using the Lee-Carter demographic model based on the abridged life tables. The discount factor for future cash flows are generated from stochastic interest rates. Our simulation results indicate that based on the benchmark scenario, RM instruments by private providers are likely to achieve about 50% replacement ratio for the 4-room public housing owners. However, the market may be missing if a replacement ratio of 70% is required.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22566.

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Date of creation: Jan 2005
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Handle: RePEc:eab:financ:22566

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org
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Keywords: replacement ratio; probability of loss; risk free interest;

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References

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  1. Ngee-Choon Chia & Albert K C Tsui, 2005. "Medical Savings Accounts in Singapore : How much is adequate?," Finance Working Papers, East Asian Bureau of Economic Research 22567, East Asian Bureau of Economic Research.
  2. Christopher J. Mayer & Katerina V. Simons, 1994. "Reverse Mortgages and the Liquidity of Housing Wealth," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 22(2), pages 235-255.
  3. Mitchell, Olivia S. & Piggott, John, 2004. "Unlocking housing equity in Japan," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 18(4), pages 466-505, December.
  4. Chia, Ngee Choon & Tsui, Albert K. C., 2003. "Life annuities of compulsory savings and income adequacy of the elderly in Singapore," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 2(01), pages 41-65, March.
  5. McCARTHY, DAVID & MITCHELL, OLIVIA S. & PIGGOTT, JOHN, 2002. "Asset rich and cash poor: retirement provision and housing policy in Singapore," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 1(03), pages 197-222, November.
  6. Marie-Eve Lachance & Olivia S. Mitchell, 2002. "Guaranteeing Defined Contribution Pensions: The Option to Buy-Back a Defined Benefit Promise," NBER Working Papers, National Bureau of Economic Research, Inc 8731, National Bureau of Economic Research, Inc.
  7. Ruth Hancock, 1998. "Can housing wealth alleviate poverty among Britain's older population?," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 19(3), pages 249-272, August.
  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  9. Sally R. Merrill & Meryl Finkel & Nandinee K. Kutty, 1994. "Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 22(2), pages 257-299.
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