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The Luxembourg Wealth Study : enhancing comparative research on household finance
Rome, 6th July 2007
Do the elderly reduce housing equity? An international comparison
Maria Concetta Chiuri* and Tullio Jappelli**
* Università di Bari, CSEF and CHILD** Università di Napoli Federico II, CSEF and CEPR
2
Outline
Motivations
Main contribution of our paper
The evidence to date
The international dataset
Estimating ownership trajectories
Explaining international differences
in ownership trajectories
3
Motivation 1 - Policy
Population aging makes of clear policy interest understanding the determinants of decisions over:
how much to save how to save should wealth be annuitized, … etc. as people get older.
o Real estate is the largest component of total wealth (more than 70% of tot. wealth)
4
Motivation 2 - Theory Life Cycle Hypothesis (LCH) predicts
that with perfect markets selfish individuals run down their wealth in order to smooth consumption over their life-cycle
from owning to renting or downsizing.
Bequest motives Housing as a source of consumption
itself
5
Main contribution of our paper
A systematic international comparison of age-trajectories of home-ownership
17 OECD countries, 59 national surveys,
years 1974-2000, 300.000 obs.
Empirical test on whether they are explained by differences in financial markets, institutions and public policy.
6
The evidence to date -1
US Feinstein and McFadden (1989) use PSID and find
transition from owning to renting of <0.3% per year. Venti and Wise (2002; 2004) HRRS, SIPP, AHDAOO find
1.76%; but about 8% for those with precipitating shocks; they do not depend on h/h composition. Cohort effects are relevant.
Fisher, Johnson, Marchand, Smeeding and Torrey (2007) evidence from CEX that the elderly prefer to stay in their home.
Canada Crossley and Ostrovsky (2003) use three Canadian
surveys and find an annual decline of 0.6% from age 55 to 80.
7
The evidence to date - 2
UK Ermisch and Jenkins(1999) use five waves
of BHPS and find only rare residential mobility.
Germany Börsch-Supan (1994) compare data from
Germany and the US and find that the decline is similar in the two countries.
9
Country Survey and years available
Australia Australian Inc. and Hous. Costs Survey: 1981
Austria Micro-census: 1987, 1995; ECHP : 1997
Belgium Panel S. of CSP: 1985, 1988, 1992, 1997; Panel S. of Belgium H/h: 2000
Canada S. Consumer Fin.: 1975, 1981, 1987, 1991, 1994, 1997;
S. of Lab. and Income Dyn. 2000 Denmark Income Tax S.:1987, 1992 Finland Income Distribution S.: 1995, 2000 France Household Budget S.: 1984, 1989, 1994
Germany GSoEP : 1984, 1989, 1994, 2000 Ireland ESRI Survey: 1987; ECHP: 1994, 1996, 2000 Italy SHIW: 1986, 1991, 1993, 1995, 1998, 2000 Luxembourg Lux. Socio Econ. Panel S.: 1985, 1997, 2000
Table 1- The international dataset: the LIS project
10
-continued
Netherlands Add. Enq. on Use of Pub. Serv.: 1983, 1987. SoEP: 1991, 1994, 1999
Norway Income and Prop. Distrib. S.: 1986
Spain Exp. and Inc. S.: 1990
Sweden Inc. Distrib. S.: 1992, 1995
UK FamEx S.:1991, 1995; Fam. Res. S.: 1999
US Census: 1974, 1979, 1986, 1991, 1994, 1997, 2000
All countries 59 surveys; 300,967 women aged 50-80.
11
Sample selection
Definition of h/h heads is biased:
Individuals rather than h/hse.g. if they move in their children’s place,
treated as renters.
Mortality rate and potential entrance in a nursing home:
women aged 50-80.
12
Table 2- Sample composition by age-groupsCountry Age 51-60 Age 61-70 Age 71-80
H/hs Indiv.s H/hs Indiv.s H/hs Indiv.s
Australia 41.45 39.13 33.91 33.84 24.65 27.04
Austria 42.27 38.74 34.45 34.41 23.28 26.85
Belgium 45.54 44.87 34.76 34.49 19.70 20.64
Canada 43.59 41.95 30.20 29.67 26.21 28.38
Denmark 41.62 40.07 33.76 33.16 24.62 26.77
Finland 52.84 50.99 32.23 31.90 14.93 17.11
France 45.32 43.48 34.00 34.14 20.68 22.38
Germany 48.55 45.54 33.26 33.74 18.20 20.72
Ireland 45.59 44.72 32.87 32.09 21.53 23.19
Italy 46.52 44.89 33.80 33.85 19.67 21.26
Luxemb. 47.63 45.66 31.56 30.91 20.81 23.43
Netherl. 44.44 42.56 34.59 35.22 20.97 22.22
Norway 44.75 44.20 35.47 34.65 19.78 21.15
Spain 46.67 42.79 33.89 35.45 19.44 21.76
Sweden 47.29 45.94 28.61 27.96 24.10 26.10
UK 41.81 40.47 33.92 33.56 24.27 25.97
US 46.52 44.90 31.37 31.33 22.12 23.77
13
Further data treatment
Comparability in educational attainment: ISCED classification
Survey design can vary over time
14
Table 3- Ownership by age-group (individuals)
Country Age 51-60 Age 61-70 Age 71-80
Australia 82.16 81.02 71.76
Austria 67.04 60.69 47.16
Belgium 77.60 74.89 65.33
Canada 78.62 73.73 58.98
Denmark 65.40 54.02 43.65
Finland 83.54 75.10 61.62
France 69.27 67.56 55.11
Germany 49.62 50.62 41.44
Ireland 89.93 87.82 78.24
Italy 69.74 64.36 50.02
Luxemburg 79.23 71.89 57.90
Netherlands 44.92 33.41 22.67
Norway 67.21 55.93 39.11
Spain 80.02 74.32 57.30
Sweden 75.39 69.12 53.32
United Kingdom 75.93 67.08 55.58
United States 76.52 76.92 72.03
15
Cross-sectional vs. cohort adj. profiles
In a cross-section individuals belong to different generations.
Repetead cross-sections allow to track cohorts over time.
Avg. home-ownership rates for 30 age groups (from age 51-80).
16
Estimating ownership trajectories -1
The restricted model:
[1]where:f(a) is a common third order polynomial of ageX= educ, marital and work statusb=common cohort effectγ=country fixed eff.
Model [1] is estimated with WLS using a robust Var matrix to control for neighborhood effects.
cbaccbacba bXafH ,,,,,, )(
17
Table 4- Regressions for homeownership (N=1595)
No cohort effects
With cohort effects With cohort effects and demographics
Age 0.038 0.078 0.104
(0.025) (0.024)** (0.025)**
Age2 -0.047 -0.046 -0.037
(0.018)* (0.018)** (0.018)*
Age3 0.003 0.003 -0.000
(0.004) (0.004) (0.004)
Year of birth 0.004 0.005
(0.000)** (0.000)**
Married 0.041
(0.017)*
High school and college -0.032
degrees (0.022)
Employed 0.071
(0.017)**
Country dummies yes yes yes
R-squared 0.78 0.80 0.81
18
.4.5
.6.7
.8
50 60 70 80
Cross-sectional profile Cohort-adjusted profile
Figure 1. The cross-sectional and cohort-adjusted profile of homeownership (all countries)
19
Estimating ownership trajectories -2 The assumption that age and cohort effects are the
same in all countries is rather restrictive (an F-test rejected the null at 1 percent level).
A more general model for each single country:
[2]where:f(age) is a third-order polynomial in age. b=cohort effect
We plot the difference in cohort-adjusted ownership trajectories between 4 age groups (age 61-65, age 66-70, age 71-75 and age 76-80).
baba bagefH ,, )(
20
Figure 2. The cross-sectional and cohort-adjusted profiles of homeownership
.2.4
.6.8
1.2
.4.6
.81
.2.4
.6.8
1.2
.4.6
.81
50 60 70 80 50 60 70 80
50 60 70 80 50 60 70 80
Austria Belgium Canada Denmark
Finland France Germany Ireland
Italy Luxembourg Netherlands Sweden
UK US
Cross-sectional profile Cohort-adjusted profile
21
Figure 3. Change in ownership: from age-group 61-65 to 66-70
-.08 -.06 -.04 -.02 0 .02Change in cohort adjusted profile
US
UK
Sweden
Netherlands
Luxembourg
Italy
Ireland
Germany
France
Finland
Denmark
Canada
Belgium
Austria
22
Figure 4. Change in ownership: from age-group 66-70 to 71-75
-.08 -.06 -.04 -.02 0Change in cohort adjusted profile
US
UK
Sweden
Netherlands
Luxembourg
Italy
Ireland
Germany
France
Finland
Denmark
Canada
Belgium
Austria
23
Figure 5. Change in ownership: from age-group 71-75 to 76-80
-.08 -.06 -.04 -.02 0Change in cohort adjusted profile
US
UK
Sweden
Netherlands
Luxembourg
Italy
Ireland
Germany
France
Finland
Denmark
Canada
Belgium
Austria
24
Compare with previous findings
Negative values in all contries (after age 70)
Large differences across countries
Can we trace such differences to country characteristics?
25
Explaining international differences in ownership trajectories
o Characteristics of rental market, moving costs.
Wealth taxes, property taxes and transaction costs
The generosity of Social Security systems
o The local availability of long term care services
o Financial markets development
26
Explaining international differences in ownership trajectories
The availability of financial instruments which help house-rich but cash poor old people to release housing equity:
Reverse mortgages Mortgage equity withdrawal (trading-down,
over-mortgaging, re-mortgaging or second-mortgage)
o Regulation in financial mkt difficult to distinguish from other economy-wide regulation
27
Table 5 - Index of mortgage market and economy-wide regulation, property taxes and no. of beds in nursing homes: international comparisons
Index of mortgage market
regulation
Index of economy wide regulation
Property taxes to GDP ratio
Number of beds in nursing homes
Australia .1 .30 .027 4.8
Austria .9 .37 .006 1.7
Belgium .9 .50 .013 2.9
Canada .5 .41 .037 12.2
Denmark .3 .19 .017 5.1
Finland .5 .08 .011 4.3
France .7 .60 .024 1.3
Germany .7 .39 .01 8.6
Ireland .1 .06 .016 6.9
Italy .9 .75 .023 2.7
Luxembourg .3 .036 5.9
Netherlands .5 .08 .019 3.8
Norway .3 .34 .011 9.1
Spain .5 .42 .02 0.3
Sweden .3 .43 .02 5.4
UK .1 .0 .038 3.1
US .3 .09 .032 5.4
28
The index of mortgage market regulation is taken from Tsatsaronis and Zhu (2004). The score adds one point for fulfilling each of the following five criteria: (i) Mortgage rate arrangement are primarily extended on the basis of fixed rate contracts; (ii) Mortgage equity withdrawals is absent or limited; (iii) The loan-to-value ratio does not exceed 75 percent, (iv) Valuation methods of property is based on historical values, rather than based on market values (v) Mortgage backed securitization is absent or limited. The index is then normalized to one.
The index of economy wide regulation is taken from Kaufman, Kraay and Zoldo Lobaton (1999). The index is a very wide indicator of the degree of economic regulation covering many different regulatory areas (state control, barriers to entrepreneurship, administrative regulations, tariff and non-tariff barriers, etc.) aggregated through factor analysis.
29
Figure 6. Change in ownership and mortgage market regulation
Ireland
UK
Denmark
Luxembourg
USSweden
Finland
Netherlands
Canada
France
Germany
Belgium
Austria
Italy
-.1
-.0
8-.
06
-.0
4-.
02
0
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1
Ch
ange
in o
wn
ersh
ip
Index of mortgage market regulation
Note. Cohort-adjusted change in ownership between age 71-75 and age 76-80.
30
Figure 7. Change in ownership and economy-wide regulation
Note. Cohort-adjusted change in ownership between age 71-75 and age 76-80.
UK
Ireland
Netherlands
Finland
USDenmark
Austria
Germany
Canada
Sweden
Belgium France
Italy
-.1
-.0
8-.
06
-.0
4-.
02
0
0 .1 .2 .3 .4 .5 .6 .7 .8
Ch
ange
in o
wn
ersh
ip
Index of economy-wide regulation
31
Table 6 Regressions for change in ownership
(1) (2) (3) (4) (5) (6)
Index of mortgage -0.045 -0.048
market regulation (0.018)** (0.024)*
Index of economy- -0.063 -0.060
wide regulation (0.016)*** (0.016)***
Property tax to GDP 1.006 0.096 0.187
ratio (0.730) (0.641) (0.416)
Number of beds in 0.003 -0.001 -0.001
nursing homes (0.003) (0.003) (0.002)
Ownership in age -0.020 -0.011 -0.036 -0.007 -0.029 -0.019
group 71-75 (0.036) (0.028) (0.054) (0.050) (0.035) (0.026)
Constant 0.003 -0.008 -0.032 -0.042 0.016 -0.003
(0.030) (0.020) (0.039) (0.042) (0.041) (0.024)
Observations 14 13 14 13 13 12
R-squared 0.36 0.61 0.15 0.06 0.49 0.72
32
Sensitivity analysis
Lagged ownership
Overall ownership rate (proxy for thin rental mkt)
Property vs. transaction taxes
Social security income replacement rate
Price to income ratio
33
Conclusion We estimated the home-ownership rate for the
elderly using data from 17 OECD countries.
The analysis at the individual level
Controlling for cohort effects, the ownership rate falls after age 70; after age 75 falls at 1% per year.
Differences across countries are highly explained by the degree of morgage mkt regulation and by the economy-wide regulation.
Credit market imperfections are an explanatory factor for international differences in the aggregate saving rate.