Abstract
This paper investigates whether the houses of Australian elderly home owners appreciate at below the market rate and examines the issues this may raise for the use of reverse mortgages as a retirement funding strategy in Australia. The viability of reverse mortgages where elderly home owners effectively borrow against their housing equity depends strongly on house prices appreciating enough to offset the outstanding loan balance at the end of the loan tenure. This paper’s findings indicate that after controlling for other influences, being aged 75 years or over lowers annual house price appreciation rate by almost 1.4 percentage points. Being aged 75 years or over also lowers home improvement expenditure by over AUD3,000 per year and this is found to be attributable to a decline in income during old age. The majority of elderly home owners want to protect at least half of their housing equity when considering participating in reverse mortgage programs, but given below-average house price appreciation rates during old age, the propensity of a 50% equity protection declines sharply with age. In particular, single females aged 75 years or over are least able to protect at least half of their housing equity, with only around 15% able to do so by the end of a reverse mortgage loan tenure. The paper also finds that, worryingly, elderly home owners with characteristics associated with slower house price appreciation rates are over-represented among reverse mortgage borrowers in Australia, namely, those aged 75 years or over, single, living in apartments or residing in states with relatively slow house price growth.
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Notes
An income unit is a person or group of persons related by marriage or parent-child relationship who live within the same household and share income (Australian Bureau of Statistics 1997). A household may comprise several groups of unrelated income units living together. About 85% of the owner-occupied houses in the sample are occupied by single income units.
Data on home maintenance, renovations and repairs expenditure are only available in the 2005, 2006 and 2007 HILDA Survey. Only expenditure data from the latest wave of the survey is used as the expenditure data is not available in all seven waves of the survey and the analysis does not require the use of a panel model.
The oldest age of home owners is capped at 90 years because it is unlikely that very old home owners would enter into reverse mortgages given many would find it difficult to continue ageing in their own homes due to physical frailty and the more complex care requirements associated with very old age. Australian lenders are also unlikely to offer reverse mortgage to very old home owners. Bluestone Equity Release, Australia’s first specialist reverse mortgage company, offers reverse mortgage loans to elderly home owners aged up to 90 years (Bluestone Equity 2008a).
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Acknowledgements
The author would like to thank two anonymous referees for their helpful comments and constructive suggestions. The author is also grateful to Anusha Mahendran and Clinton McMurray for their valuable research assistance. This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The HILDA Project was initiated and is funded by the Australian Government Department of Families, Community Services, Housing and Indigenous Affairs (FaCHSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (MIAESR). The findings and views reported in this paper, however, are those of the author and should not be attributed to either FaCHSIA or the MIAESR.
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Ong, R. House Price Appreciation in Old Age: Analysis and Issues for the Use of Reverse Mortgages as a Retirement Funding Strategy in Australia. Population Ageing 2, 139–160 (2009). https://doi.org/10.1007/s12062-010-9021-5
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DOI: https://doi.org/10.1007/s12062-010-9021-5