Young Man Lee, Jun-Hyung Kim, Hyun-Ah Kim and Man Cho (2016-10), "Wealth composition and drawdown patterns of retirees: a comparative study," International Review of Financial Consumers, 1(1): 41-54.
Abstract
Recent housing market depression has resulted in the concerns about future demand of homeownership. Due to the expectation of less capital gain, households may prefer renting to owning. However, there are still various reasons to choose homeownership such as longer-term stay, no rent burden, control over residential environments and favorable government tax system. Based on the descriptive and logistic regression analyses using micro-data of 2010 and 2014 Korean Housing Survey, this paper reports that 88~95% of homeownership demand results from the consumption demand. This implies that recent market depression may not discourage homeownership demand significantly. This paper also reveals the determinants of classification into consumption demand and investment demand―householder’s age, education, job, household size, income, asset, and area of residence.
This study aims to pursue a two-fold research objective: first, to examine the wealth composition and its drawdown patterns of the retirement-age households in Korea and, second, to assess policy options to safely monetize real estate assets held by them, the reverse annuity mortgage (RAM) in particular. In so doing, we compare our findings to those from the U.S. as reported by Poterba, Venti, and Weiss (2011). The results indicate that, between the U.S. and Korea, the wealth compositions of the retirees are vastly different in several respects: first, the average share of real estate in Korea is far greater than that in the U.S., over 80 percent vs. 24.7; second, the share of the annuitized public and private pensions is far higher in the U.S. compared to Korea, 44.9 percent vs. 7.7 percent in Korea; third, the share of financial assets is roughly similar, that is, 12.6% in the U.S. and 10.3% in Korea; last but not least, the share of non-residence real estate rapidly rose rapidly between 2006 and 2012 in Korea, quite dramatically for certain consumer cohorts. Hence, the Korea case represents an extreme of ‘real estate-rich-cash-poor’ retirees, making it a fertile ground for trading the monetizing instruments such as RAM. Nonetheless, the market penetration by the product is still minimal, the subscription rate of 0.81 percent among all the eligible households as of 2015. To investigate empirically the reasons behind such low subscription rate, we perform a regression analysis on determinants of the propensity for entering the RAM contract; The results show that the bequest motive does reduce the propensity to subscribe the product, and that the two indicators of the consumer knowledge on the product do yield positive and statically significant results. Based on the findings, we stress the need for a heightened level of consumer education on the viewpoint of the protection financial consumers, for which the government, the lending and guaranteeing institutions, as well as academia should put a concerted effort so as to help elderlies make rational decisions.
Keywords
Household wealth composition; Reverse annuity mortgage; Bequest motive; Protection of financial consumer