IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp12656.html

Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security

Author

Listed:
  • Bravo, Jorge Miguel

    (Universidade Nova de Lisboa)

  • Ayuso, Mercedes

    (University of Barcelona)

  • Holzmann, Robert

    (University of New South Wales)

Abstract

The demographic change underway, declining adequacy levels from traditional pay-as-you-go old-age social security systems, structural reforms in pension schemes and the reduction in the traditional family support have increased the need for additional private savings to cover the old age income gap. In this paper we discuss the necessity, the role and the viability of home equity release schemes in supplementing public and private pensions in an integrated way. We use the latest European data from the Eurosystem Household Finance and Consumption Survey (HFCS) to analyse the household's wealth composition and accumulation process in the euro area. To quantify the size of the housing wealth and its potential to enhance existing and future retirement income, we compute the equity-to-value ratio (ETV) for all countries, estimate the time to loan payoff and compute the amount of home equity that is expected to be released over a 10-year period through regular monthly mortgage payments. We then catalogue and discuss the many alternative options for managing and accessing housing wealth over the life cycle, and highlight the main characteristics, risks, advantages and drawbacks of the two most important market products (home reversion plans and reverse mortgages). Finally, we discuss the main demand-side and supply-side obstacles and challenges to the development of equity release markets and extract some policy implications.

Suggested Citation

  • Bravo, Jorge Miguel & Ayuso, Mercedes & Holzmann, Robert, 2019. "Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security," IZA Discussion Papers 12656, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp12656
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp12656.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Davidoff, Thomas, 2010. "Home equity commitment and long-term care insurance demand," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 44-49, February.
    2. Ayuso, Mercedes & Bravo, Jorge Miguel & Holzmann, Robert, 2016. "On the Heterogeneity in Longevity among Socioeconomic Groups: Scope, Trends, and Implications for Earnings-Related Pension Schemes," IZA Discussion Papers 10060, IZA Network @ LISER.
    3. Ayuso, Mercedes & Bravo, Jorge Miguel & Holzmann, Robert, 2016. "Addressing Longevity Heterogeneity in Pension Scheme Design and Reform," IZA Discussion Papers 10378, IZA Network @ LISER.
    4. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(2), pages 137-150.
    5. Barro, Robert J & Friedman, James W, 1977. "On Uncertain Lifetimes," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 843-849, August.
    6. Wenli Li & Rui Yao, 2007. "The Life-Cycle Effects of House Price Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1375-1409, September.
    7. Holzmann, Robert & Ayuso, Mercedes & Alaminos, Estefanía & Bravo, Jorge Miguel, 2019. "Life Cycle Saving and Dissaving Revisited across Three-Tiered Income Groups: Starting Hypotheses, Refinement through Literature Review, and Ideas for Empirical Testing," IZA Discussion Papers 12655, IZA Network @ LISER.
    8. James Banks & Richard Blundell & Zoë Oldfield & James P. Smith, 2010. "Housing Price Volatility and Downsizing in Later Life," NBER Chapters, in: Research Findings in the Economics of Aging, pages 337-379, National Bureau of Economic Research, Inc.
    9. Declan French & Donal McKillop & Tripti Sharma, 2017. "Analysis of Housing Equity Withdrawal by its Forms," CHaRMS Working Papers 17-04, Centre for HeAlth Research at the Management School (CHaRMS).
    10. Hosty, G. M. & Groves, S. J. & Murray, C. A. & Shah, M., 2008. "Pricing and Risk Capital in the Equity Release Market," British Actuarial Journal, Cambridge University Press, vol. 14(1), pages 41-91, March.
    11. Ayuso, Mercedes & Bravo, Jorge M. & Holzmann, Robert, 2021. "Getting life expectancy estimates right for pension policy: period versus cohort approach," Journal of Pension Economics and Finance, Cambridge University Press, vol. 20(2), pages 212-231, April.
    12. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
    13. Waltraud Schelkle, 2012. "A Crisis of What? Mortgage Credit Markets and the Social Policy of Promoting Homeownership in the United States and in Europe," Politics & Society, , vol. 40(1), pages 59-80, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Baulkaran, Vishaal & Jain, Pawan, 2024. "Home equity and retirement funding: Challenges and opportunities," Global Finance Journal, Elsevier, vol. 61(C).
    2. Edyta Marcinkiewicz, 2023. "Elderly vs. Working-Age Generation: Homeownership and Housing Asset Inequality in a Cross-Country Perspective," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 170(2), pages 447-463, November.
    3. Edyta Marcinkiewicz & Filip Chybalski, 2022. "Income-Poor, Asset-Rich? The Role of Homeownership in Shaping the Welfare Position of the Elderly," LWS Working papers 38, LIS Cross-National Data Center in Luxembourg.
    4. Holzmann, Robert & Ayuso, Mercedes & Alaminos, Estefanía & Bravo, Jorge Miguel, 2019. "Life Cycle Saving and Dissaving Revisited across Three-Tiered Income Groups: Starting Hypotheses, Refinement through Literature Review, and Ideas for Empirical Testing," IZA Discussion Papers 12655, IZA Network @ LISER.
    5. Edyta Marcinkiewicz & Filip Chybalski, 2022. "Is There a Trade-off between Housing and Pension System Generosity? Empirical Evidence from the Luxembourg Wealth Study," LWS Working papers 37, LIS Cross-National Data Center in Luxembourg.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    2. Mercedes Ayuso & Jorge M. Bravo & Robert Holzmann & Edward Palmer, 2021. "Automatic Indexation of the Pension Age to Life Expectancy: When Policy Design Matters," Risks, MDPI, vol. 9(5), pages 1-28, May.
    3. Bravo, Jorge M. & Ayuso, Mercedes & Holzmann, Robert & Palmer, Edward, 2023. "Intergenerational actuarial fairness when longevity increases: Amending the retirement age," Insurance: Mathematics and Economics, Elsevier, vol. 113(C), pages 161-184.
    4. Asiye Aydilek, 2025. "The role of health shocks after age 70 on housing and wealth profiles," PLOS ONE, Public Library of Science, vol. 20(1), pages 1-24, January.
    5. Aydilek, Asiye, 2016. "The allocation of time and puzzling profiles of the elderly," Economic Modelling, Elsevier, vol. 53(C), pages 515-526.
    6. repec:esx:essedp:712 is not listed on IDEAS
    7. Jorge Miguel Bravo, 2019. "Funding for longer lives. Retirement wallet and risk-sharing annuities," EKONOMIAZ. Revista vasca de Economía, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 96(02), pages 268-291.
    8. Horneff, Wolfram J. & Maurer, Raimond H. & Stamos, Michael Z., 2008. "Life-cycle asset allocation with annuity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3590-3612, November.
    9. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2009. "Asset allocation and location over the life cycle with investment-linked survival-contingent payouts," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1688-1699, September.
    10. Miyoshi, Yoshiyuki & Toda, Alexis Akira, 2017. "Growth effects of annuities and government transfers in perpetual youth models," Journal of Mathematical Economics, Elsevier, vol. 72(C), pages 1-6.
    11. Pancrazi, Roberto & Pietrunti, Mario, 2019. "Natural expectations and home equity extraction," Journal of Housing Economics, Elsevier, vol. 46(C).
    12. Ralph S.J. Koijen & Stijn Nieuwerburgh & Motohiro Yogo, 2016. "Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice," Journal of Finance, American Finance Association, vol. 71(2), pages 957-1010, April.
    13. Yu Ren & Yufei Yuan, 2014. "Why the Housing Sector Leads the Whole Economy: The Importance of Collateral Constraints and News Shocks," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 323-341, February.
    14. Hippolyte d’Albis & Ikpidi Badji, 2019. "Intergenerational inequalities in mortality-adjusted disposable incomes," Vienna Yearbook of Population Research, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna, vol. 17(1), pages 037-069.
    15. David Love & Lucie Schmidt, 2015. "Comprehensive Wealth of Immigrants and Natives," Working Papers wp328, University of Michigan, Michigan Retirement Research Center.
    16. Tripti Sharma & Declan French & Donal McKillop, 2022. "Risk and Equity Release Mortgages in the UK," The Journal of Real Estate Finance and Economics, Springer, vol. 64(2), pages 274-297, February.
    17. Joachim Inkmann & Paula Lopes & Alexander Michaelides, 2011. "How Deep Is the Annuity Market Participation Puzzle?," The Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 279-319.
    18. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1547-1640, Elsevier.
    19. repec:bla:jrinsu:v:84:y:2017:i:s1:p:319-343 is not listed on IDEAS
    20. Fehr, Hans & Hofmann, Maurice, 2020. "Tenure choice, portfolio structure and long-term care – Optimal risk management in retirement," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    21. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2217-2240.
    22. Bommier, Antoine & Leroux, Marie-Louise & Lozachmeur, Jean-Marie, 2011. "On the public economics of annuities with differential mortality," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 612-623, August.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G1 - Financial Economics - - General Financial Markets
    • J1 - Labor and Demographic Economics - - Demographic Economics
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp12656. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Fallak (email available below). General contact details of provider: https://edirc.repec.org/data/izaaalu.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.