Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

APPENDIX A

Housing Wealth Among the Elderly

Olivia S. Mitchell Insurance & Risk Management, The Wharton School, University of Pennsylvania

 

John Piggott School of Economics, University of New South Wales

 

 

 

 

A necessary precondition for the use of reverse mortgages (RMs) is the existence of private housing equity.¹ In developed countries, enormous wealth is held in residential property. Viewed from the perspective of strategic asset allocation, an owner-occupied dwelling is illiquid and undiversified. Indeed, elderly people on average possess greater housing wealth than the population average, but they can also have incomes that are much lower than those received by younger groups.

WEALTH IN HOUSING

We next turn to an examination of the characteristics of housing wealth and ownership among the elderly in three countries: the United States, Japan, and Australia. It should not be surprising to find that, in all three countries, home equity represents the largest component of household assets. In Japan, for instance, 51 percent of total assets were nonfinancial in 1996, and of these, home equity was by far the largest component (Ellis and Andrews). In Australia, housing assets amounted to 50 percent of all household assets according to a government 1996 survey.² In the United States, housing equity comprised 44 percent of all household wealth, much higher than the second largest component, interest-bearing securities, according to a Census Bureau survey in 1995.³

We caution that ...