A consortium led by the University of Birmingham has completed an EU FP7 research project called DEMHOW (Demographic Change and Housing Wealth). Links to the various reports of the research team are available here: http://www.demhow.bham.ac.uk/reports/
DEMHOW (Demographic Change and Housing Wealth) was funded by the EU under its Framework 7 Programme. It involves research partners in 10 member states, with an Advisory Board chaired by AGE and with representatives of European Mortgage Federation, RICS Europe, and OECD.
Below is a short description of the including attachment of the main report of their findings drafted in 2010 and a communiqué from October 2010 from DEMHOW and AGE Platform Europe “Reverse mortgage can’t solve Europe’s pension problems”.
While reverse mortgages are not THE solution to the EU’s pension problems, they do offer certain consumers a valuable option in their retirement. However, as explained in detail in a recent European Commission study conducted by iff, the risks of these products for consumers (and providers) are considerable and therefore the sale of these products should be carefully monitored. For details of Equity Release Schemes in the EU, see the iff publication Equity Release Schemes in the European Union (Reifner et al.)
The Eurostat has also just published its latest population forecasts and the following reminds of the coming importance of regulating the equity release schemes appropriately. “The old age dependency ratio in the EU27, i.e. the population aged 65 years and older divided by the population aged 15 to 64, is projected to increase from 26% in 2010 to 53% in 2060. In other words, there would be only two persons aged 15 to 64 for every person aged 65 or more in 2060, compared with four persons to one in 2010. The old age dependency ratio is projected to be 60% or more in Bulgaria, Germany, Latvia, Poland, Romania and Slovakia, and 45% or less in Belgium, Denmark, Ireland, Luxembourg and the United Kingdom.”
Abstract
1.1 PROJECT OBJECTIVES
The starting point of DEMHOW is the observation that macro processes of demographic change that are leading to an EU-wide shrinking and ageing of populations are accompanied by another macro process: the EU-wide changes to housing systems. The co-incidence of these two macro processes suggests the intriguing question of the extent to which home ownership provides a potential cure for some of the consequences of ageing populations, as well as contributes to the causes. The overall aim of DEMHOW is, then, to investigate the ways in which, across member states, demographic change and housing wealth are linked, and to use those investigations in order to contribute to policy making.
1.2 WORK PERFORMED DURING THE PROJECT
In the first period of the project, two main areas of research have been undertaken and completed:
Econometric Analysis. Using macro and micro data, econometric studies have been carried out in order to investigate how the composition of wealth has changed over countries, with respect, in particular, to changes in population, housing systems, state pension arrangements, and financial institutions.
Policy Analysis. Using scientific literature and policy documents and drawing on international evidence within and without the EU, the strengths and weaknesses of housing equity based approaches to the provision of pensions and other welfare needs in old age have been assessed.
There has been progress in two further areas. Firstly, a household interview schedule has been designed and piloted and the full interviews carried out by partners in eight member states. Secondly, dialogue and dissemination activities - ranging from the establishment of a website, the presentation of papers at conferences and the holding of advisory group meetings - have been undertaken.
1.3 MAIN RESULTS
The econometric methodologies applied in the first stage of the project have enhanced European added value by using the similarities in and differences between member states to inform analysis. The findings provide important insights into the understanding of housing assets and their use. Even so, the conclusions are limited and provisional for a number of reasons. These include the wide diversity across the member states in all dimensions being studied, the lack of completeness of the data sources available, and the fact that the substantive findings can be considered as preliminary, to be added to by studies scheduled to be undertaken later in the project.
Housing as a financial asset
In econometric studies, savings and consumption are generally examined through the life cycle model, which, in simplified form, assumes that during their working lives individuals save money out of their income in order to be in a position to consume during their retirement years, a process referred to as consumption smoothing. The DEMHOW study adds to this a recognition that housing is both consumption - of the flow of services provide by the physical structure - and investment - as a capital and tradable asset. Since house purchasers frequently make use of a housing loan, housing thus enters directly and in an interconnected way into consumption strategies.
Albeit with differences between countries, the general pattern is that European households tend to behave as if housing, whatever else it might mean to them, is a financial asset which is used like other financial assets: broadly, households save in the years during which they work, and use savings in retirement to supplement income from pensions. So, over their life course up to the age of retirement and maybe beyond, households increase the amount of their housing wealth, as well as the amount of cash they have in bank accounts, the value of shares they hold and so on.
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