Requirements to make the housing asset a viable retirement asset

Andrews, Doug (2009) Requirements to make the housing asset a viable retirement asset. In, UNSPECIFIED Schaumburg, US, Society of Actuaries.


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A study published in June 2007 performed jointly by the Canadian Institute of Actuaries
and the University of Waterloo, entitled Planning for Retirement: Are Canadians Saving
Enough?, concluded that: two thirds of Canadian households planning to retire in 2030 are not
saving adequately to meet necessary living expenses in retirement; and home ownership will
help to narrow the gap in savings, but by itself, won’t be enough. This study referred to a report
by Statistics Canada that showed that in 2005, 69.2 percent of Canadians aged 65 or older owned
a home and 88 percent did not have a mortgage. The median value of equity in the principal
residence for Canadians aged 65 and older was $163,400. From the foregoing, I conclude that:
• many Canadians approaching retirement own a home,
• the home and its value are an important part of retirement savings for many
Canadians, and
• over their period of retirement many Canadians will need to convert their home
equity into retirement income at the same time determining where and how they
will be domiciled.
An ideal arrangement would be for home owners to be able to access the equity in their
homes to provide retirement income, that the retirement income would be guaranteed to continue
for as long as the home owner and the owner’s spouse lived, and that the housing asset could be
sold or exchanged at any time during the retirement period to accommodate the individuals’
changing requirements. In theory, a reverse mortgage could be written to offer these features.
However, in practice, the reverse mortgage permits only a fraction of the house’s appraised value
to be borrowed and is priced in a manner that is unattractive to borrowers. Furthermore, there is
no institution that seems particularly well structured to provide the ideal product.
This paper examines the characteristics of an ideal product and the type of institution or
institutions that would be well positioned to offer the ideal product. The characteristics of the
ideal product include the market mechanisms necessary to permit protection against longevity
risk, and risk spreading among financial institutions. The paper argues that a government agency
should provide the no negative equity guarantee. With this risk removed form the private sector,
pension plans that seek real estate investments could be part of the solution.
In view of the recent bailout of Fannie Mae and Freddie Mac in the United States, any
proposal to create real estate-backed investments will be controversial. This paper shows that the
proposed investment structure avoids some of the weaknesses that contributed to the need to bail
out certain financial organizations. Although the proposed structure is specifically designed for
the Canadian economic and regulatory environment, it is anticipated that the characteristics of
the ideal product will have global application and the characteristics of the facilitating
institutions identified will be helpful to foreign researchers in considering the design of an
institution structure that would be appropriate to deliver an attractive reverse mortgage product
in their country.

Item Type: Book Section
Subjects: Q Science > QA Mathematics
Divisions: University Structure - Pre August 2011 > School of Mathematics > Statistics
ePrint ID: 149133
Date Deposited: 30 Apr 2010 09:26
Last Modified: 27 Mar 2014 19:08

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