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

  • Ngee-Choon Chia

    (SCAPE)

  • Albert K C Tsui

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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File URL: http://saber.eaber.org/node/22566
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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
Contact details of provider: 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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  1. 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, vol. 22(2), pages 235-255.
  2. 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, vol. 70(1), pages 1-16.
  3. 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, vol. 22(2), pages 257-299.
  4. Ngee-Choon Chia & Albert K C Tsui, 2005. "Medical Savings Accounts in Singapore: How much is adequate?," SCAPE Policy Research Working Paper Series 0502, National University of Singapore, Department of Economics, SCAPE.
  5. 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.
  6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  7. Nandinee K. Kutty, 1998. "The Scope for Poverty Alleviation among Elderly Home-owners in the United States through Reverse Mortgages," Urban Studies, Urban Studies Journal Limited, vol. 35(1), pages 113-129, January.
  8. 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, vol. 1(03), pages 197-222, November.
  9. Olivia S. Mitchell & John Piggott, 2004. "Unlocking Housing Equity in Japan," NBER Working Papers 10340, National Bureau of Economic Research, Inc.
  10. 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, vol. 2(01), pages 41-65, March.
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