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Economic validity analysis of housing reverse mortgages in China

Author

Listed:
  • Wei Han
  • Yushi Jiang

Abstract

Purpose - The purpose of this paper is to empirically analyze the investment and pension functions of housing reverse mortgages (HRM) with redemption option and raise the participation initiative of the Chinese elderly for the HRM model and enhance their cognition of this financial product. Design/methodology/approach - Based on the perspective of the financial decisions of the elderly, this study designs an analysis model of the economic validity of HRM, and takes Shanghai (a pilot city for HRM loans in China) as an example, using data from the Shanghai real-estate index and market interest rates from January 1998 to December 2018, as well as the contract data of HRM, for empirical analysis. Findings - The results show that the HRM with redemption option has the characteristics of European call option and can obtain the value of implicit option from the perspective of the elderly. Considering the present value of the accumulated pension income, the present value of the redemption option and the present value of the final housing value, the elderly can obtain investment income from HRM with redemption option. Therefore, for Chinese seniors, the HRM with redemption option has economic validity. Research limitations/implications - From the perspective of the demand of the elderly, participation in the HRM with redemption option can increase the life expectancy annuity for various pension expenditures and improve economic status while meeting the demand of inheritance motivation. Practical implications - This study helps to clarify the financial decision-making process for elderly people who participate in HRM. On the one hand, it helps policy makers to optimize the implementation mode of HRM and promote the healthy and rapid development of HRM; on the other hand, it is conducive to raising the awareness of Chinese elderly people on this financial products and enhancing their enthusiasm for participating in HRM. Originality/value - Few studies have directly analyzed the financial decision process of the HRM model from the perspective of the demand of the elderly. This study enriches the research viewpoint and method of HRM and accumulates data about the Chinese experience with HRM.

Suggested Citation

  • Wei Han & Yushi Jiang, 2019. "Economic validity analysis of housing reverse mortgages in China," China Finance Review International, Emerald Group Publishing Limited, vol. 9(4), pages 498-520, August.
    • Handle: RePEc:eme:cfripp:cfri-07-2018-0111
    DOI: 10.1108/CFRI-07-2018-0111
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    Citations

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    Cited by:

    1. Wei Han & Ping Wang & Hongjie Dong, 2020. "Influence of Egoistic and Altruistic Bequest Motives on the Willingness to Participate in Reverse Mortgages in China," Asian Economic Journal, East Asian Economic Association, vol. 34(4), pages 430-463, December.
    2. Deng, Yongheng & Gu, Quanlin & He, Jia, 2021. "Reinforcement learning and mortgage partial prepayment behavior," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).

    More about this item

    Keywords

    Economic validity; European call option; Financial decision; House-for-pension scheme; Housing reverse mortgage; Redemption option; C58; G17; G21; H55;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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