International Perspectives on Homeownership and Home Equity Extraction by Senior Households

Abstract

This paper links the literatures on the life cycle hypothesis, homeownership, home equity, and pensions. Empirically, the focus is on the E.U. and U.S. It explores the extent that seniors extract their home equity and discusses the financial instruments available for equity extraction. We use data from the E.U. and U.S. to determine homeownership rates, house values, and mortgage debt. With these values, the amount of seniors’ home equity is measured for each country. The usage of home equity extraction methods is reported and factors limiting their use are identified. We find that seniors’ home equity is a substantial share of their total wealth. Estimates for 2013 are that their home equity equals about $5 trillion euros in the U.S. and over $8 trillion euros in large E.U. countries. We find that only a small share of seniors extracts their home equity. While there are supply side constraints in many countries, the evidence suggests that the cause of low extraction rates is the lack of demand. Various reasons for the lack of demand are discussed. The increasing share of seniors in most countries’ population suggests there will be increasing pressure on public pension systems. One among many options to address this issue is to impose a wealth test for eligibility, where wealth includes home equity. This study suggests that, although home equity is substantial for many seniors, they are reluctant to access the funds.