Channeling Tom Selleck, China Tries Reverse Mortgages

(Bloomberg Opinion) -- The China Banking and Insurance Regulatory Commission wants to help the elderly enjoy their golden years in comfort. With the world's fastest-aging population and a pension system beset by shortfalls, China is turning to a staple of late-night television commercials -- reverse mortgages -- to help out retirees. It just might work.

Outside of Beijing and Shanghai, China's real-estate market is nearly moribund after years of spiraling values drove home-ownership beyond the reach of many people. In the southern city of Shenzhen, which has an official population of 12.5 million and more than 4 million housing units, only 12,804 units changed hands in the first half of this year. To put that in perspective, it would take 163 years at this rate to sell off existing units. In the coastal city of Xiamen, with a population of more than 4 million, just 2,500 units were sold. 

Yet housing is one area where China has significant untapped wealth and low debt ratios. When the government began letting people buy their own property, or at least secure long-term leases on state-owned land, most of the existing housing stock was sold to tenants at heavy discounts.

After decades of rising prices, the paper value of homes now far exceeds outstanding loan values. While the estimated paper value of urban residences is about 360 trillion yuan, total household debt is only 44 trillion yuan. Even if you assume that all Chinese consumer debt was used to purchase an urban apartment, this would suggest a loan-to-value ratio of only 12 percent. In other words, 88 percent of China's urban home value would be owner-equity.

At the same time, China has a looming pension crisis. State-run plans face large and growing shortfalls, estimated at almost $100 billion. Some provinces have either run out of money to service their pensions or soon will. Government subsidies to the social-insurance fund are budgeted to rise by 35 percent in 2018. And yet, for many Chinese, pensions are pitifully small as it is: By one estimate, they average only about 1,400 yuan per year.

Under such conditions, reverse mortgages -- essentially, loans to the elderly that allow them to draw down home equity -- might make sense. Take a typical household with 1.2 million yuan in home equity. A Chinese retiree at 60 would have an average of 15 years ahead. Assuming he took an annual payment of 75 percent of urban disposable income, this would consume roughly 400,000 yuan of the remaining equity in his house while significantly improving his quality of life.

As the ranks of Chinese elderly grow and caring for them gets costlier, then, reverse mortgages could certainly be part of the solution. But that doesn't mean they're without risks. (Their track record in the U.S. certainly isn’t spotless.)

For one thing, financial institutions should be required to act as fee-only providers rather than shadow-owners of real estate. The amount of equity that can be tapped by retirees should also be limited. Just as high down payments are usually required when buying a home in China, it would be reasonable to limit the future payout of a reverse mortgage to, say, 70 percent of the estimated value of the property. Allowing the homes to be sold after a borrower’s death, with remaining proceeds distributed to heirs, might also help reduce risk.

With such safeguards in place, a reverse mortgage program could significantly help out China's retirees without unduly adding financial risk. As Tom Selleck might say, "It's not too good to be true!"

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen and author of "Sovereign Wealth Funds: The New Intersection of Money and Power."

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