Home ownership as wealth over the life cycle
European Household Motivation for Residential Assets
Current situation and future prospects
INTRODUCTION
Encouraging Home Ownership
Most countries encourage households to become homeowners in a more or less active way. Some
even use the percentage increase of homeowners as an explicit and quantitative target in public
policy.
Yet there is no correlation between a country’s wealth and the proportion of home owners.
Homeownership rates in Western Europe
(Source: EMF – 2007)
90%
83%
80%
77%
75%
80%
74%
71%
68%
67%
70%
58%
57%
57%
54%
60%
51%
49%
43%
50%
40%
30%
20%
10%
G
er
m
an
y
S
w
ed
en
D
en
m
ar
k
N
et
he
rla
nd
s
Fr
an
ce
A
us
tri
a
Fi
nl
an
d
Lu
xe
m
bu
rg
B
el
gi
um
K
in
gd
om
G
re
ec
e
U
ni
te
d
P
or
tu
ga
l
Ire
la
nd
Ita
ly
S
pa
in
0%
4
The grounds for this preference for buying one’s home are identical nearly everywhere, but are not
included in this paper.
A principal reason for these policies is to respond to household preferences, but it is not the only
objective. Property is also often seen as an element of social stability, as a means of a stronger
resident involvement in community life. Thus the diversity of dwelling occupancy status within the
same area will be a factor of social mix peculiar to the promotion of urban redevelopment.
But subsidising home-buying is equally a way to support building activity especially if, as is the case
in France, subsidy is higher when directed towards new housing. In addition, subsidising homebuying is considered less costly for the community than subsidy which is orientated towards the
rental sector because of financial efforts that home-buyers make themselves, which are far greater
than those they would expect to bear as tenants.
Finally, for average households, home-buying is the first way to accumulate assets. To an increasing
extent, the prospects for pension scheme equilibrium contribute to this issue. Now, the goal is to
reach the point where most households own their own home by the time they cease working and their
incomes decline. There is therefore a dual advantage of being the owner of your home: reducing
spending on housing at the point when your income begins to fall as a result of ceasing work, and
having an estate which can be drawn on if the need arises.
Percentage of home owners and property assets
However, the percentage of home owners does not reflect the share of housing in total household
wealth. Firstly, a distinction should be made between home owners and home-buyers. Home-buying
is the process through which an individual buys housing through a long term loan which is
guaranteed by the property. The buyer’s residential property is equal to the value of the property
minus the remaining debt owed to the money lender, known as equity in Britain and actif net in
French.
The progression in property has been a world phenomenon since the Second World War, but has
evolved in two different ways. Firstly, most former socialist countries transferred rented public
sector housing to occupants more or less free of charge. With an often extended security of tenure in
the premises, sometimes even transferable to children of occupants, tenants find themselves the
owner of their home. The cost of upkeep for this housing is also simultaneously transferred to them.
What is the inherited value of this housing acquired outside of the market? It is precisely the
development of exchange and the creation of a housing market which progressively allows their
resale value to be determined. Home-buying developed in countries where there was strong legal
certainty of the mortgage deed and where income in households with stable jobs was increasing.
But this evolution occurred in countries where the housing stock has very diverse characteristics: the
original formerly industrial countries had a large endowment of social housing stocks while other
countries, mainly in the South, experienced a large number of home owners without mortgages, who
owned their property outright.
Because of this variation, the actual situation in the different countries in the European Union has
sharp contrasts, more from the point of view of percentage of owner-occupiers, than the proportion
of home-buyers in this total. A final important element stems from different countries’ differing
mortgage practices and the possibility of drawing from the equity withheld by the household to
finance expenditure other than that linked to housing itself. These are the different techniques,
known as equity withdrawal, which allow a household to take advantage of their residential asset.
Many elements should therefore be examined to appreciate the link between housing and household
wealth and the share of housing in total household wealth.
Firstly, the owner occupation rate:
Next, the proportion of home-buyers amongst owners, i.e. those who still have a loan they are paying
off, guaranteed by the property.
Finally, the relationship between household mortgage debt and GDP.
The extreme diversity of situations that these figures reflect stems from the housing market
equilibrium in the different EU countries, but also partly from the differences in mortgage practices.
Different types of equity withdrawal
The development of mortgage credit is very unequal within the EU.
The volume of credit, openness of supply, and diversity of products all vary considerably, but are
increasing everywhere. This evolution accompanies the financiarisation of property. Equity
withdrawal appears amongst these products. It can be defined as a means of mobilising residential
assets through a mortgage. This technique therefore allows a household to finance diverse
expenditures through the accumulated value in the housing they own and, more often than not, that
they occupy. This technique can be used for different purposes and it presents completely different
risks.
Yet, there is frequent confusion between the two principal forms of equity withdrawal: equity
withdrawal stricto sensu and reverse mortgages, also known as equity release. This is because they
both enable the obtaining of liquidity from a housing good (more precisely the principal residence in
all the known examples), in return for a mortgage for the good in question.
Confusion also arises because these two innovations are part of a movement to modernise and get
closer to the way the Anglo-Saxon mortgage market works.
Yet equity withdrawal and reverse mortgages are fundamentally different in terms of their technical
characteristics as well as the risks they present, on both an individual and macroeconomic level.
Firstly, equity withdrawal is only aimed at home-buyers who already have a loan that they are
currently repaying; the increase in the size of the loan therefore prolongs the duration of being
indebted, and if need be, by increasing the level of debt, sometimes above its initial level, when the
value of the good rises and regulations allow.
In general, reverse mortgages involve mortgaging a good free of this constraint, either because the
home-buyer has finished paying off his loan or has never taken out a loan. He will therefore consume
the total value of his good only once (even if the payments can be scheduled), whilst in the case of
equity withdrawal, the agent can increase his debt as long as its total amount is less than the value of
the collateral, and as many times as he likes on the obvious condition that he can repay what he
borrows.
Mortgage
300 000
Total Amount
250 000
Value of Good
200 000
Net Asset
150 000
100 000
Debt
50 000
0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Year
Lifetime Mortgage (6%)
300 000
Value of Good
Total Amount
250 000
200 000
Net Asset
150 000
100 000
Debt
50 000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Year
Refillable Mortgage
250 000
Value of Good
Total Amount
200 000
Net Asset
150 000
100 000
Debt
50 000
0
0
2
4
6
8
10
12
14
16
18
Year
20
22
24
26
28
30
32
34
This is where the principal difference between the two products lies; the reverse mortgage does not
have to be repaid by the borrower; it may be repaid by his heir if they decide to keep the good, but
the important thing is that, by construction, the credit risk doesn’t exist because the periodic
instalment isn’t owed by the borrower.
Conversely, the reverse mortgage provides resources that can allow the repayment of debt: the
payment of local taxes, which are large in the US, is one of the principal reasons for resorting to this
kind of loan and local bodies sometimes suggest specifically adapted products. Any accusation that
they create a risk of over borrowing is therefore completely unfounded. In no circumstance can the
reverse mortgage make the home-owner lose his property because, even in the case where the
amount of the debt is greater than the market value of the property, the borrower is assured of being
able to remain there until he dies. The only risk is if an old person, to whom the reverse mortgage is
aimed, takes an inopportune decision, the consequences of which they have not fully understood, at
the expense of the heir.
In the case of equity withdrawal, there may be a large temptation to indebt oneself beyond a
reasonable level, at least in the case where borrowing capacity evolves positively as a function of the
value of the good. But here, the borrower pawns his principal residence. It goes without saying that
this product is especially widespread in countries where the mortgage guarantee can be demanded
and the house is repossessed without too much concern
The current crisis has shown that this risk was not just theoretical. Many households have found
themselves in a situation of negative equity and their movements hampered. If it proves to be
necessary to sell - even in the absence of unpaid debts, but for example to find a job in another area this leaves the home-buyer without housing but with a debt owed to the lender. Few European
countries have non-recourse contracts, limiting a mortgagor’s liability to the value of the house; in
this case, a mortgagor in a position of negative equity can give the house back to the mortgagee and
‘walk away’.
In addition, the general decrease in house prices mechanically increases the percentage of borrowers
in ‘negative equity’ and through the application of current accounting rules ‘marked to market’,
reduces the volume of new loans which the lender can grant.
The macroeconomic effects of the two products are also (and above all) very different. The effect of
reverse mortgages on household consumption depends of the value of the good and the anticipated
interest rate when the contract is signed. Even if instalments are equal over time, there is no time
bomb for the economy (the only scenario to consider in this respect is a sensitive, noticeable and
long lasting fall in the value of goods after the baby boom generation has disappeared, supposing that
they have largely resorted to reverse mortgages. However, only the insurance sector will be affected
by this).
Increasing the size of an existing housing loan in order to meet a new purpose, on the other hand, is
a dynamic process, the extent to which varies as a function of conditions affecting the value of goods
and the current interest rate. Its impact is heightened by the negative correlation between these two
variables. In particular, a fall in house prices provokes a backward surge in household consumption
and eventually increases the effect of a rise in interest rates on the economy, beyond the desired
level. There is also an inverse effect: a rise in house prices fuels a rise in household expenditure,
hence equity withdrawal increases the volatility of the economy.
The distinction should also be made between countries where mortgages are at a fixed rate and those
where they are at a variable rate. Only in the case of a variable rate will the authorities (eg the ECB)
have an actual effect on the credit rate, through their link with short term interest rates. The only risk
is that this effect will be amplified by the phenomenon in question. In the case of countries where
rates are fixed, therefore dependant on long term rates and so world saving, the authorities cannot
establish the damage.
The single rise in house-price can therefore allow a household to increase the value of their loan, thus
realising the wealth effect resulting from the increase, independent of the repayment rate of the loan.
The current crisis reflects the dangers of this practice, because conversely a drop in house prices
could put households in a position where their mortgage debt is more than the value of the property it
is financing, negative equity. This situation has very damaging consequences: house-buyers who are
in a position of negative equity, see their mobility restricted because they cannot resell without
making a loss.
It could be considered that the current crisis would have the effect of slowing down development of
equity withdrawal in the form of equity withdrawal. In fact, current analysis shows that countries
with a high home-owner rate and high residential debt in relation to GDP are those where homebuyers are the most shaken by the financial crisis.
% of homeowners 2007
Residential
debt/GDP Loss ratio
2007
(delays and seizures)
France
56.50 %
34.90 %
No increase 2008 / 2007
Germany
43.20 %
47.70 %
No increase 2008 / 2007
Spain
86.30 %
61.60 %
Sharp increase 2008 / 2007
Great Britain
70.00 %
86.30 %
Sharp increase 2008 / 2007
Netherlands
54.00 %
100.00 %
No increase 2008 / 2007
US
71.00 %
71.00 %
Sharp increase 2008 / 2007
Canada
68.00 %
45.60 %
No increase 2008 / 2007
Italy
80.00 %
19.80 %
No increase 2008 / 2007
Sources: European Mortgage Federation National Experts, National Central Banks, National Statistics Offices, Eurostat, International
Monetary Fund, SCHL
But, more fundamentally, these two ways of using ones mortgage have different purposes: only
reverse mortgages respond to the needs of elderly people. However they are not independent: the
development of equity withdrawal puts back repayment of loans and reduces the equity accumulated
by households; in the same way they stop this equity being mobilized to meet expenditure in old age.
And yet the steady increase in life expectancy, characteristic of European countries, risks making the
recourse of households to resources that come from capital accumulated in their property
increasingly necessary.
RECENT
AND
CURRENT
DEVELOPMENTS
ADVANCED ECONOMIES
Here we are interested in these diverse forms of reverse mortgages or equity release.
ACROSS
A full study was carried out by the Institut für Finanzdienstleistungen in 2009 of supply of different
forms of equity release schemes within the EU1. The author of the present paper was associated
with the study for the French section.
Beforehand, he wrote two reports for the French government in collaboration with others: one
intending to introduce reverse mortgages in France, under the name prêt viager hypothécaire2, and
the other on the prospects of the use of reverse mortgages for financing spending in old age3.
A number of the following pieces of information are based on these reports.
I.
The mobilization of residential assets responds to potential needs which are likely to rise.
The purpose of reverse mortgages is to enable old people who own their home to transform
immobile capital into cash.
The number of elderly home owners will rise...
In many European countries, the number of elderly home owners will rise.
“All European countries demonstrate strong similarities in their age and population structures.
Their age pyramids are in part due to the conflicts these countries were involved in, but are also
shaped by common demographic trends. All countries have seen a fall in birth rates and death rates
over recent decades. Because of this, their age pyramids have a tendency to narrow at the bottom
and widen towards the top or in the middle portion, which reflects the ageing population...”4.
Taking the example of France, on the 1st January 2000, there were 58.7 million inhabitants. 12.5
million of whom were older than 60 and more than 4.5 million were aged 75 or over. This proportion
of elderly people in the total population is destined to see a strong increase over the next decades. As
the age of entrance in institutions will fall, this growth will have direct repercussions on the number
of old people living in their principal residence.
1
2
Cf. http://ec.europa.eu/internal_market/finservices-retail/docs/credit/equity_release_part1_en.pdf
Cf. http://www.anil.org/fileadmin/ANIL/publications/Etudes/6510.pdf
3
Cf. en français : http://www.anil.org/fileadmin/ANIL/Etudes/2008/mobilisation_actif_residentiel_personnes_agees_fr.pdf
Cf. in English : http://www.anil.org/fileadmin/ANIL/Etudes/2008/mobilisation_actif_residentiel_personnes_agees_en.pdf
4
Cf. Économie et statistiques n° 343, 2001 - Claudie Louvot-Runavot
The proportion of home-owners is steadily rising
The proportion of households that own their home is very unequal across Europe. However, the
owner-occupier rate has been continuously growing since the Second World War in all these
countries, consistent with the leanings of housing policies that the majority of governments have
followed for many decades.
The proportion of home owners that are not in the process of buying their property in the total
population increases with the age of the person of reference, at least up to a certain age, currently of
around 75 years old.
Propo rtion o f ho me ow ners without outst anding rep aym ent s
a ccording to the age of the perso n of reference
80 %
70 %
60 %
50 %
40 %
30 %
20 %
10 %
0%
< 25
ans
2 5 -2 9
1 97 3
3 0 -3 4
3 5-3 9
1 97 8
4 0-4 4
45 -49
1 9 84
5 0 -5 4
5 5 -5 9
19 8 8
6 0 -6 4
6 5 -6 9
1 99 2
70 -7 4
1 9 96
75 -7 9
> 80
an s
20 02
Source : INSEE, housing division, from housing study. This rate is the proportion of homeowner households without outstanding repayments in relation to the real total of
households for each age group.
Housing represents the largest part of elderly people’s wealth...
Note: Mean wealth per household in PPP corrected euro. Bank accounts include contractual housing savings. Car value
and owner share of business is not included.
Source: Calculated mean values from the SHARE 2003-2004 database.
In 1998, the proportion of housing in total estates (excluding professional estate) was on average
69% for all households, 62% for retired people over the age of 50, and 56% for retired people over
the age of 70. These proportions vary slightly with income, with the exception of the first decile,
whose total estate is very low, and for the upper quartile whose estate is large and comprises of a
greater proportion of financial assets.5 For the majority of households, especially if they have a
modest or average income, the principal residence is the only property held. The global value of
principal residences owned and occupied by the 5.5 million retired households was estimated in
January 2002 to be
Elderly people’s need for cash will rise...
Whilst capital owned by elderly people through their principal home has, without doubt, never been
so high, it is also likely that their need for cash will grow over the next few years. On one hand, we
can see from the age pyramid that the ratio of people working with respect to the number of retired
5
Source : INSEE.
people will decrease, particularly from 2005 onwards when the first generation of the baby boom
reaches retiring age.
600 000
Number of households by occupation status and age of head of house (1st January 2001)
Source: CGPC d'après DGI-Filocom
Total for age
bracket
500 000
Other
400 000
Renters or Private Sector
300 000
200 000
Owner Occupiers
100 000
Age of head of house (years)
0
20
30
40
50
60
70
80
90
On the other hand, increased life expectancy, as well as the fact that it will decrease the ratio of the
number of people working with respect to the number of retired people, means that the funding
requirement for old age is growing and will continue to grow further in the future.
Lastly, the decrease in the birth rate and the increase in the age of heirs at the time of death change
the conditions of the transfer of inheritance between generations: at the time of death, the heirs are
often already settled and, moreover, may be the owners of their own home.
Consequently, the legacy of a child occupying their parent’s house is becoming less and less
frequent. However, the expected transfer of liquidity by donation to their children, but also to their
grandchildren, which is encouraged in certain countries by the state, is growing.
This results in an increased need for cash permitting the elderly home owner to improve their
resources or financially support their descendants, all whilst remaining in their property.
The recent phenomenon of elderly people relying on revolving loans has developed rapidly in a
number of countries. On a macroeconomic level, the mobilisation of a residential asset of an elderly
person allows them to increase their consumption or that of their descendants, at least during the
implementation of the system, by the direct effect of anticipated recycling of the property value.
The maintenance of property belonging to impecunious elderly people poses a specific
problem...
It is difficult for retired people, especially when faced with a tight budget constraint, to get a classic
loan in order to maintain their property. In the case of the condominium, the consequences are even
worse, as the incapacity of some elderly people to finance high maintenance expenditure of the
property can freeze its renovation and create a progressive degradation, which is harmful for all
occupants.
II. Different forms of mobilisation of household residential assets
Elderly people who wish to mobilise their residential assets and unlock their capital can currently
resort to several solutions. One of these naturally can be to sell their property and downsize or (once
again) become a tenant. We will only mention here the solutions which do not require the individual
to move house.
Renting part of a good
An elderly person can benefit from additional revenues by renting part of their property. However, it
is essential that the physical configuration of the property is lent to this. Furthermore, the loss of
personal space can also be dissuading.
‘Viager’: Reverse Annuity Mortgages
Selling one’s house to either obtain a lump sum or to purchase a life annuity whilst remaining in the
house until death is a well-known system in France.
The system involves a transaction between two individuals6. Around a third of these operations are
conducted between members of the same family. Compared to the reverse mortgage, which I will
discuss further, the ‘viager’ presents an obstacle whereby the disagreeable face to face meeting
between two people is required, one of whom is financially interested in the death of the other.
Moreover, in principle it procures higher liquidities, in return for the inconvenience that the seller
6
French insurance companies can buy housing in return for a life annuity ( explicitly authorised by the insurance code),
however this practice seems to be becoming obsolete.
must give up any increase in future value of the good. The British home reversion plan is similar: the
buyer is generally a moral person. The direct face to face meeting is therefore not required. What is
more, a home reversion plan only allows the sale of a certain proportion (no more than 50%) of the
good
The division of the property
This solution consists of what translates from the French as “bare ownership” and involves a kind of
leasehold. Nevertheless, the division of the property is rarely practiced outside of the family circle,
where more often than not it is the result of inheritance. British people are familiar with these kinds
of operations. Apart from the fact that the forms of splitting the property are more varied than they
are in France,
help to home-buying sometimes takes the form of sharing the property, “shared-
ownership” with a “housing association”.
Lease-back
This involves the sale of a property to a buyer who then rents the property to the seller for life.
Whilst the seller benefits from renting the property, the operation can be beneficial to him and
further increase the expenditure of the community.
III. The current state of supply and production
The curb on the development of supply
The mortgage market is not developed very equally within the European Union, with regards to
volume of production, mortgage methods, diversity of products and the completeness of the market.
In particular, equity withdrawal products are not available in all countries.
Two elements are to be taken into consideration: the legal framework and the volume of production.
The modification of the legal framework clashes with strong cultural values regarding systems that
favour personal consumption over intergenerational transfer. There are a lot of examples in the
literature, which condemn equity release in the different countries that have adopted this system. In
2006 France produced a legal framework designed to permit the development of equity withdrawal,
under the name hypothèque rechargeable. However, these laws’ effect on the market remained
modest.
These products are complex, difficult to put in place, and demand a large investment from the
innovative company. These innovators are not certain whether the potential demand is sufficient
enough to make the initial investment profitable. Reverse mortgages are considered as an insurance
product as opposed to a credit product.
From the point of view of a lender, the risk of excess lending leads to a risk of a new nature.
It combines in fact not only the risk from the borrower’s life expectancy (something in which the
insurance company normally manages), the risk from interest rates, but equally a risk from value of
the property when the loan is repaid.
In the three countries presented below as case examples, the risk of over lending is managed in
different ways.
In the United Kingdom two lenders (Norwich Union, of the Aviva group and Northern Rock) hold
90% of the market, one of them securitized this risk (with the exception of the risk from lifeexpectancy, which they retained; it is an insurance group), the other retained it in the balance sheet
(however they could securitize it in the future). It involves therefore a pure market mechanism.
In contrast, federal involvement prevails in the United States. The federal government organises and
counter guarantees an insurance7 against the risk, financed by the premiums paid by borrowers,
which covers the lifetime mortgage whilst meeting certain conditions (limiting the amount of the
loan, obligation to consult an outside consultant, etc...), that is to say 90% of the market ( “HECM8”
loans). The other loans either give rise to the securitization of the risk of over borrowing (Jumbo
cash accounts of Financial Freedom), or are retained in the portfolio (“Home Keeper” loans of
Fannie Mae), especially considering their weak outstanding discounted bills.
In Canada, one sole private firm, the Canadian Home Income Plan (CHIP), put into place the bulk of
reverse mortgages, and the rest of the credit organisations make do with sending their clients to
them.
The different methods of controlling the risk of over lending reflect the different housing policy
traditions in these three countries.
7
Supported by the FHA, Federal Housing Administration, whom equally give a similar guarantee to the Federal state for
some home buying loans.
8
Home Equity Conversion Mortgage
In the United States, the Federal government favours access to housing credit. The policy leaves its
mark on the weight of agencies (Government Sponsored Enterprises: Fannie Mae, Freddie Mac,
Ginnie Mae etc.) put into place at the height of Keynesianism in reaction to the 1930s crisis and the
breakdown of credit supply.
In the United Kingdom there are marked liberal characteristics.
In Canada, the Canadian mortgage and housing society (a public agency that greatly intervenes in the
financing of housing, by refinancing and credit insurance) hasn’t wanted to offer a risk guarantee for
over lending for reverse mortgages because the organisation doesn’t perceive it to be a sufficiently
social objective.
Each of these methods presents advantages and inconveniences.
It is a key decision for France,
from the point of view of the state, whether or not to intervene in the management of the risk of over
lending, for mortgages, so that the debt is limited to the value of the house. To the same extent in
Great Britain as in France, the State chose not to intervene in the covering of risk. On the contrary,
in the United States, it is the FHA’s intervention which has structured the entire market.
Hungary, as one of the newer member states, provides another case example. It has had a unique
experience: before transition, a special version of life-care contracts was very popular. Under the
Housing Law, tenants of public housing were allowed to transfer their tenancy rights to a third
person in exchange for ‘life care’, defined as a monthly payment or actual care provision, or a
combination of the two. These life-care contracts still exist today.
After Hungary’s transition, some local governments started to offer an annuity in exchange for
ownership of the property. The XIII District in Budapest began offering them in 1997, and other
local governments followed the model, for example, the cities of Székesfehérvár in 2001 and
Tatabánya in 2005. However, due to the lack of resources in local government, there are only a
limited number of cases. Two types of products are supplied:
1. Life annuity products which have two components: cash transfer which is equal to between 1530% of the market value, and an annuity, calculated on the bases of the client’s age and family
status. The average annuity has a value of between 30,000 and 100,000 HUF (around 100 to 300
EUR). HILD, one of the institutions active in this market, offered different varieties of this
product wish have different ratios of the cash payment and the annuity, and one kind offers the
possibility of the equity being inherited by an assigned person.
2. HILD also offers another special product (the reverse mortgage) where the client can keep the
property rights to their home, and which works in the same way as a general purpose mortgage
loan. Another institution, FHB, also uses this product.9
In 2006, the ombudsman and the Hungarian Financial Supervisory Authority reported that there was
no legal regulation of the life annuity contracts, but no action has been taken. There are eligibility
criteria necessary for obtaining a life annuity contract, but financial institutions have their own rules
concerning the underwriting of these contracts.
There are currently three financial institutions offering reverse mortgage products.
HILD Life Annuity Programme (HILD Örökjáradék Program Magyarország) (from 2005)
FHB Life Annuity Zrt (from 2006)
OTP Life Annuity Ltd. (from 2006)
The table shows some dimensions of their activities.
HILD
FHB
OTP
Age
65
65 years for
70
women, 62 for men
Value of the
property
n/a
minimum 5 million minimum 7 million,
HUF
maximum 22 million
HUF
Settlements
Pest county, and
larger cities (36
settlements)
Specified circle of
settlements where
property prices are
higher and stable
n.a.
The current state of production
The IFS has tried to calculate the amount of supply in EU countries. One difficulty is distinguishing
between credit institutions and simple brokers.
9
Source: Newsletter of the Hungarian Banking Association, 2009.1.
http://www.alinea.hu/pages/tevedesbolbankar/hirlevel_2009-1.html
Total Equity Release Sold in 2007
Country
Total Volume of Equity Release
Outstanding
(Millions of €)
Austria
n/a
Discounted
Bill
Average Loan Value
Number of Contracts
(€)
n/a
n/a
Bulgaria
n/a
n/a
n/a
Finland
n/a
n/a
n/a
France
20.0
100 000
200
Germany
10.0
100 000
100
Hungary
3.2
n/a
n/a
Irland
n/a
n/a
n/a
Italy
74.3
247 500
300
Holland
n/a
n/a
n/a
Romania
n/a
n/a
n/a
Spain
1 268.0
352 222
3 600
Sweden
110.0
44 000
2 500
United Kingdom
1 825.0
55 303
33 000
Total
3 310.5
83 387
39 700
Source: IFS
There are no official statistics available for Hungary, but the estimated number of contracts are as
follows:
Financial
Estimated Number of contracts
Institutions
HILD
2000
FHB
2000
OTP
1500
The total value of the contracts is 60-70 billion HUF.
The following countries do not offer this type of product: Belgium, Cyprus, Turkey, Denmark,
Estonia, Greece, Lithuania, Luxembourg, Malta, Portugal, Slovakia, and Slovenia.
The only countries where it is possible to obtain the precise statistics are Great Britain and France,
knowing that in France all supply comes from a single interlocutor, le Crédit Foncier de France (the
national mortgage bank in France). This company provides us with a distribution of supply as a
function of the age of the policy subscriber in 2007:
65 years old
16%
70 years old
25%
75 years old
34%
80 years old
47%
90 years old
56%
95 years old
66%
According to the IFS, the total number of equity release contracts has been slightly below 25 000 in
2007. Great Britain produced 16 500 by itself. This therefore means a niche market where the
outstanding discounted bills are 0.1% of that of the entire mortgage market.
This is also reflected in the OECD’s 2005 statement:
“In markets such as the Netherlands, the United Kingdom and the United States, flexible refinancing
practices and a wide range of mortgage products have enhanced households’ ability to manage their
debt position and interest rate exposure, and extract equity from their home. Reverse mortgages (or
home equity conversion mortgages) target older homeowners, and offer a variety of cash flow
profiles. Payments to households are structured similarly to an annuity, and repayment is not
required as long as the borrower uses the home as his or her principal residence. However, in most
countries, these instruments are still scarcely used, including because they require a relatively high
degree of household financial education. Even in the United States, where the reverse mortgage
market has developed rapidly in recent years, it remains very small.”10
IV. The development prospects of equity release
Can one evaluate the development prospects of equity release in Europe? The figures are currently so
modest that it is necessary to look at all countries which practice equity release in a significant way
(including Great Britain, the United States and Canada).
Strong growth of strength, but still limited
One observes a tendency of the development of production of lifetime or reverse mortgages in the
countries who have introduced them first. The growth is still very rapid in the United States, which
10
OECD 2005 report entitled Ageing and Pension System Reform p.51
is an advanced indicator on this matter. However, this growth applies to a very modest number in
relation to the potential population concerned.
The reverse mortgage has existed since the 1960s, however the true development came in the 1990s
when the US Department of Housing and Urban Development introduced a program guaranteed by
the FHA (Federal Housing Organisation), the Home Equity Conversion Mortgage or HECM, which
now represents the main part of the market. 450 000 HECM reverse mortgages have been agreed
since their introduction, however the production has grown over the past few years: nearly 74 000 in
2006, 107 558 in 2007 and 112 000 in 2008, according to HECM statistics. Analysts deem that it is
a matter of elderly people confronting the growing difficulties in an economy which is slowing
down.
In these three countries, the flow of new loans remains limited although is growing strongly:
Canada
Canadian
Home
Income
Plan
United States
United Kingdom
United Kingdom
HECM
« Lifetime mortgages »
« Home
Annual Budget
(CHIP)
reversion
plans »
(****)
(*)
Number
of Value of new loans (millions Number
new loans
of Canadian Dollars)
new loans
1990 23
1.1
157
1991 78
5.6
1992 122
of Number
of
new
loans Value of new transactions
(millions of Pounds)
(millions of Pounds)
389
54.8
22.4
9.8
1 019
10.3
18.6
1993 191
13.4
1 964
8.8
14.9
1994 161
11.7
3 365
6.9
18.1
1995 299
18.7
4 164
4.5
28.0
1996 323
21.6
3 589
3.9
40.3
1997 598
36.2
5 188
4.4
65.6
1998 967
47.6
7 889
6.3
121.0
1999 1216
52.6
7 895
84.7
155.4
2000 1456
63.6
6 627
297.4
226.8
2001 1212
63.7
7 789
359.2
213.0
2002 Approx. 1200
76.5
13 049
16 302
651.1
200.8
2003 Approx. 1200
76.9
18 084
(**) 25 000
1032.2
129.4
2004 ?
new loans
of Value
(***) 35 000
(*) Beginning 1st October of the preceding calendar year; HECM loans represent over 90% of total ‘reverse mortgages’
(**) Extrapolation from first 3 trimesters
(***)Extrapolation from first 2 first trimesters
(****) “Home Reversion” plans are not “Reverse Mortgages”, but a kind of life annuity
The country where the number of Reverse Mortgages is the highest in relation to the size of population is by far the UK
However, the numbers remain very weak throughout, in proportion to the number of reverse
mortgages destined for the purchase of the property, like the number of mortgage loans for
consumption11, but equally in proportion to the number of elderly homeowners.
11
Consumption mortgages held by elderly American households are 300 times greater than the reverse mortgages in
2001 (and the more than 100 times greater in 2004)
The range of people consulted varies according to the causes for the recent strong growth of the
number of reverse mortgages. It is probably a combination of several factors:
a) The take-off of house prices and low level of interest rates
The price of housing since 1998 has taken off in a context of low interest rates, and this is
unanimously mentioned as a factor determining the explosion of the flow of reverse mortgages in the
United States and the United Kingdom. If this really is the case, this flow should strongly slow down
when the house prices and the anticipations of their underlying increase fall, as well as when the
interest rate finds itself once more at a level closer to its historical average.
b) Better common knowledge and quality of supply
In the United Kingdom, the improvement of supply (limiting debt to the house value, “good code of
conduct” of borrowers in the framework of their professional association SHIP12) has contributed to
the decline of the disastrous image that similar products acquired during the 1980s and 1990s. In the
United Kingdom as in the United States, a greater notoriety of these products, consequential of the
promotional efforts of lenders, equally seems to have played an important role.
c) Interactions in the shares and bond markets
At the time of discussion, it was sometimes suggested that, in the countries where pensions are partly
funded by financial assets, the decrease of share prices and the low interest rate since 2000 would
have reduced the resources of elderly people who will have to resort to indebting themselves.
Nevertheless there has not been a very convincing analysis in support of this causality, which has led
to its relativization.
d) Demographic and cultural factors
Demographic and cultural factors are sometimes put forward: individuals today who reach the
average age of those with reverse mortgages (75 years old) haven’t known the deprivation triggered
by the crisis of the 1930s and the second world war as an adult responsible for a household, and are
accustomed to resorting to credit, which increases their propensity to borrow once elderly.
Nevertheless, this demographic effect, slow in nature, could only have contributed weakly to the
sudden increase in size.
12
Safe Home Income Plan
e) Increase in spending on health
An increase in spending on health has without doubt reinforced the demand for reverse mortgages in
the United States but its pace has not particularly exploded since 1999. This factor which is
sometimes put forward therefore appears to be secondary for the recent increase. Nevertheless, it
should support the development of the lifetime mortgage in the long-run.
The reverse mortgage responds most certainly to the needs of financing the elderly, which will
increase in years to come. It should therefore develop, taking into account the forecasts of the main
traders: a product which will really take off when the children of the baby boom generation reach 75
years of age. The obstacles which stem from the unequal development of mortgage methods in
Europe cannot be easily overcome. It remains to be an expensive product, which causes conflict in
some population’s consideration of money, of inheritance, and of the solidarity between generations,
and even the choices concerning the financing of pension systems.
AFTER THE CRISIS: A HALT TO THE DEVELOPMENT OF
LIFETIME MORTGAGES?
The subprime crisis has arisen at the same moment that the development of the production of lifetime
mortgages has just experienced a strong acceleration in the United States.
It is necessary to remind ourselves that the first and main producers of this type of loan consider it to
be a niche product and have forecast that it will truly find its place at the moment when the babyboom generation reaches its 15th year, which will be towards 2020. They founded their analysis on
the fact that the cohorts born after 1946 will be, at that time, “house rich, cash poor” and will be
accustomed to resorting to credit. The strong progress observed from 2006 was therefore reached
before these forecasts. Will the crisis put a stop to the development of this product?
For the borrowers, apparently nothing has changed since the reverse mortgage doesn’t pose a risk for
them; however the difficulty could come from the fact that the net value of their asset will have been
severely reduced: the proportion of modest households in a situation of negative equity is particularly
high in countries where the reverse mortgage is the most sold. The global level of specific assets of
homebuyers has reduced, as has the proportion of households disposing of a level of equity sufficient
to take out a reverse mortgage.
With regards to supply, the negative factors are greater. The systematic risk resulting from a global
and strong fall in price could make the credit institutions and insurance providers more prudent. The
countries where the process involves securing loans, as carried out in the United Kingdom, could
experience difficulty in finding investors.
In reality, supply to the households could be less
appealing, the link between the amount of loan offered and the estimated value of the property being
less than before the crisis. This is what we observe in the United States. Finally, nor should one
dismiss a reluctance regarding a complicated product which is perceived to be an element of the
Anglo-Saxon mortgage method: this could moderate the desire of certain governments to encourage
the development of this product.
However, one can think that these attitudes will provoke a pause in the development of these
financial techniques, but not halt them. In fact, the necessity will remain for elderly households to
draw from their assets in order to maintain their level of consumption, and the reverse mortgages
today represents the best method to mobilise their residential asset whilst conserving the use of their
property.