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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

    ()
    (Department of Economics, National University of Singapore)

  • Albert K C Tsui

    (Department of Economics, National University of Singapore)

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 National University of Singapore, Department of Economics, SCAPE in its series SCAPE Policy Research Working Paper Series with number 0503.

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Date of creation: Apr 2005
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Handle: RePEc:sca:scaewp:0503

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Web page: http://www.fas.nus.edu.sg/ecs/scape/index.html
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Keywords: incomplete reverse mortgage market; replacement ratio; probability of loss; risk free interest; breakeven annuity;

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  1. Steven F. Venti & David A. Wise, 1990. "Aging and the Income Value of Housing Wealth," NBER Working Papers 3547, National Bureau of Economic Research, Inc.
  2. Steven F. Venti & David A. Wise, 2000. "Aging and Housing Equity," NBER Working Papers 7882, National Bureau of Economic Research, Inc.
  3. 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.
  4. Ngee-Choon Chia & Albert K C Tsui, 2005. "Medical Savings Accounts in Singapore : How much is adequate?," Finance Working Papers 22567, East Asian Bureau of Economic Research.
  5. Louise Sheiner & David N. Weil, 1992. "The Housing Wealth of the Aged," NBER Working Papers 4115, National Bureau of Economic Research, Inc.
  6. Marie-Eve Lachance & Olivia S. Mitchell & Kent Smetters, 2003. "Guaranteeing Defined Contribution Pensions: The Option to Buy Back a Defined Benefit Promise," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 70(1), pages 1-16.
  7. Olivia S. Mitchell & John Piggott, 2004. "Unlocking Housing Equity in Japan," NBER Working Papers 10340, National Bureau of Economic Research, Inc.
  8. Ruth Hancock, 1998. "Can housing wealth alleviate poverty among Britain's older population?," Fiscal Studies, Institute for Fiscal Studies, vol. 19(3), pages 249-272, August.
  9. 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.
  10. Christopher J. Mayer & Katerina Simons, 1993. "Reverse mortgages and the liquidity of housing wealth," Working Papers, Federal Reserve Bank of Boston 93-5, Federal Reserve Bank of Boston.
  11. 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.
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Cited by:
  1. Joan Costa i Font & Joan Gil & Oscar Mascarilla Miró, . "Preferencias de la población ante la financiación de la dependéncia: La hipoteca inversa en España," Studies on the Spanish Economy 230, FEDEA.

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