House Price Appreciation in Old Age: Analysis and Issues for the Use of Reverse Mortgages as a Retirement Funding Strategy in Australia

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.