Preparing the Ground for Wider Use of Reverse Mortgages
- The need for public-private sector collaboration on risk management to create a market -
March 12, 2008
1. Latent demand is growing in the reverse mortgage market
In recent years, amidst deteriorating economic conditions, many elderly households in Japan have been facing a chronic shortage of funds to cover day-to-day living expenses and find it difficult to make provision against unforeseen expenses such as the cost of hospitalization, admission to a nursing home or home nursing care. However, as around 80% of elderly households own their home, a reverse mortgage would allow many to resolve economic difficulties of this kind. Looking to the future, the number of people likely to be short of money in their old age is expected to rise still further, and the need for reverse mortgages is highly likely to rise not only among low income households but also, especially, among those in the lower middle income group, and other groups with few financial assets. However, a survey of diffusion in Japan reveals that reverse mortgages are available only from the central government, some local authorities and a few financial institutions. Not only is the content of the services available limited, but the range of people qualifying for those services is limited to residents of urban areas and those who own high-value housing.
2.Risk management by the Federal government has helped US market growth
By contrast, in the United States, which is said to have pioneered the reverse mortgage, the management of business risks peculiar to reverse mortgages, such as longevity risk, interest rate risk and the risk of a fall in proparty value, was not adequate until the mid-1980s, and for this reason, the business failed to grow and elderly people were not always able to take advantage of reverse mortgages. To resolve the situation, the Federal government established a system of collaboration between the public and private sectors, whereby private-sector financial institutions provided reverse mortgage services and government-related institutions, centering on the Department of Housing and Urban Development, managed business risk centrally and supported the lenders. Under this system, government-related institutions used multiple hedging techniques to fully hedge the business risks. This not only made it possible for lenders to save on risk management-related costs but also allowed them to avoid almost all business risk, and, as a result, private sector side was also able to take active steps to attract more users. Initiatives such as this led to a steady expansion of the reverse mortgage market in the United States.
3. The need for risk management in Japan with a view to the creation of a market
As the need for reverse mortgages in Japan is likely to grow in conjunction with the rise in the number of people uncertain of having enough money after retirement, enabling wider use of reverse mortgages is a pressing issue and there is an urgent need for the establishment of systems for the management of the risks which are currently an obstacle to commercialization. In this light, although the US housing market is undergoing a sea change and it is possible that the system in that country will be revised, the initiatives adopted in the United States may hold important lessons for Japan, where reverse mortgages still account for only 1/100 of the US market. Specifically, private-sector financial institutions should be incorporated into the existing government system as lenders, and, at the same time, their claims should be gathered together and managed centrally, under the auspices of government institutions. However, there is no denying the possibility that, in an era of birthrate decline and population aging, stagnation in the housing market may lead to stagnation in real estate prices, and the traditional methods of reducing the ratio of lending limit to property value and revising property value at regular intervals should also be continued.
For more information on the content of this report, please contact Takako Hoshi, the Japan Research Institute, Limited.