Economic validity analysis of housing reverse mortgages in China

Abstract

Purpose The purpose of this paper is to empirically analyze the investment and pension functions of housing reverse mortgages (HRM) with redemption option and raise the participation initiative of the Chinese elderly for the HRM model and enhance their cognition of this financial product. Design/methodology/approach Based on the perspective of the financial decisions of the elderly, this study designs an analysis model of the economic validity of HRM, and takes Shanghai (a pilot city for HRM loans in China) as an example, using data from the Shanghai real-estate index and market interest rates from January 1998 to December 2018, as well as the contract data of HRM, for empirical analysis. Findings The results show that the HRM with redemption option has the characteristics of European call option and can obtain the value of implicit option from the perspective of the elderly. Considering the present value of the accumulated pension income, the present value of the redemption option and the present value of the final housing value, the elderly can obtain investment income from HRM with redemption option. Therefore, for Chinese seniors, the HRM with redemption option has economic validity. Research limitations/implications From the perspective of the demand of the elderly, participation in the HRM with redemption option can increase the life expectancy annuity for various pension expenditures and improve economic status while meeting the demand of inheritance motivation. Practical implications This study helps to clarify the financial decision-making process for elderly people who participate in HRM. On the one hand, it helps policy makers to optimize the implementation mode of HRM and promote the healthy and rapid development of HRM; on the other hand, it is conducive to raising the awareness of Chinese elderly people on this financial products and enhancing their enthusiasm for participating in HRM. Originality/value Few studies have directly analyzed the financial decision process of the HRM model from the perspective of the demand of the elderly. This study enriches the research viewpoint and method of HRM and accumulates data about the Chinese experience with HRM.