The potential of home equity conversion in financing the costs of ageing societies

Abstract

PurposeThere is increasing debate about how to finance the increasing costs of our ageing societies. Much attention in Europe has recently focussed on the extent to which households would be willing to use home equity conversion products. The question to which extent home equity can contribute in financing the needs of elderly has been left unanswered. This study quantifies to what extent future income of elderly can be increased through home equity conversion for the case of The Netherlands.DesignFor a large sample of households that are either now or in the medium long run eligible for home equity conversion we estimate the amount of home equity that can be converted. We use a stochastic model to annuitize home owners’ potential income from home equity.FindingsThere are some groups of households that may substantially increase income at old age through home equity conversion. In general, however, the additional income generated from conversion is limited. This is the result of a significant asymmetry between real estate and financial markets. In the near future additional income from home equity conversion is further decreased as a result of a cohort effect: the future elderly are more highly leveraged than the current elderly. The outcomes are robust for different model assumptions.Social implicationsThe relatively little additional income to be generated from home equity conversion puts debate about financing welfare state arrangements into new perspective. The current popular idea in The Netherlands that welfare arrangements can be partially paid for by the elderly home owners themselves is proven to be false.