Unlocking Housing Equity For Pensions in Urban China

Journal of Housing For the Elderly
ISSN: 0276-3893 (Print) 1540-353X (Online) Journal homepage: http://www.tandfonline.com/loi/wjhe20
Unlocking Housing Equity for Pensions in Urban

China
Qiang Li & Satish Chand
To cite this article: Qiang Li & Satish Chand (2018): Unlocking Housing Equity for Pensions in
Urban China, Journal of Housing For the Elderly, DOI: 10.1080/02763893.2018.1451797
To link to this article: https://doi.org/10.1080/02763893.2018.1451797
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JOURNAL OF HOUSING FOR THE ELDERLY
https://doi.org/10.1080/02763893.2018.1451797
Unlocking Housing Equity for Pensions in Urban China

Qiang Li and Satish Chand
University of New South Wales Canberra
ABSTRACT KEYWORDS
This article examines the extent to which a reverse mortgage Elderly; house ownership;
may improve the income of an elderly household. This question pensions; reverse mortgage
is analyzed in the context of an aging society where the existing
Confucian contract of filial piety has been eroding with the
advent of economic and demographic transitions underway in
contemporary China. We use data from a China Household
Finance Survey that was administered in 2011 covering 949
elderly households from 22 provinces. We use models from the
literature to calculate the incremental gains to income from the
use of a reverse mortgage. The findings are revealing in terms of
the potential gains from the use of reverse mortgages. On
average, an elderly homeowner makes a monthly mortgage
payment of RMB <1,383; a reverse mortgage for the same
household raises monthly income by RMB <1,388 or 29%. The
major beneficiaries of a reverse mortgage are single and elderly
individuals possessing significant housing equity and living in
the more developed regions. Overall, the reverse mortgage
provides a means for society to allow the elderly access to
income without being a burden on the state.
Introduction
The Chinese population is aging rapidly, a trend that is likely to continue for the
future. The median age in 1980 was 22 years, had climbed to 34.5 years by 2012,
and is expected to rise to 49 years by 2050.1 The population of the elderly is pro-
jected to reach 331 million, amounting to one-third of the total population, by
2050 (Glass, Gao, & Luo, 2013). For most Chinese elderly homeowners, the main
income source is social security payments. However, public pensions were reserved
for a small proportion of the population occupying the highest echelons of society
(Nee, 1991). Access to public pensions is unavailable to those who work in the pri-
vate sector, or in small collectives, and to rural residents (McCallum, 1989).
Among those covered by public pensions, many are likely to be left short and
therefore dependent on their kin for survival. According to Jotheeswaran (2013),
CONTACT Qiang Li Juliana200874@hotmail.com Building 27, School of Business, University of New South
Wales Canberra at ADFA, Canberra, ACT2610, Australia.
1
http://www.economist.com/node/21553056 (accessed July 27, 2014).
© 2018 Taylor & Francis Group, LLC
2 Q. LI AND S. CHAND
in 2010, around 63.5% of those aged 65 years and above depended on their chil-
dren or relatives for financial support; the corresponding figure for those 85 years
and above was 71.4%. According to Wu and Guo (2010), about 84.7% of the urban
cohorts in 2010 had enrolled in the national pension system and then had a
monthly average pension of RMB <1,527 per person (i.e., US$246). The circum-
stance for the rural elderly is even worse. It was only from 2009 onward that the
Chinese government gradually introduced a pension plan, starting with a new
national cooperative medical insurance system aimed at improving access to health
care for the rural elderly.2 It was estimated that approximately 0.1 billion rural citi-
zens (that is, 34.6% of the total rural senior citizens) had participated in the scheme
in 2010, having received a monthly average pension of RMB <74 per person
(US$12) (Wu & Guo, 2010), and equal to 5% of the pension income of urban
seniors. The limited social security coverage and payments, as well as the aging
population, are driving up the growing needs in China for a change to public
pensions.
The lack of income in old age is not a problem peculiar to China, however. The
elderly are often recognized as being an income-poor but asset-rich group (Ong,
2008a; Rowlingson, 2006). The typical Chinese pensioner has income at the bot-
tom of the distribution but often owns his or her home outright. In other words,
most of the elderly enjoy meager incomes with the bulk of their savings tied up in
the family home (Chou, Chow, & Chi, 2006). According to the China Household
Finance Survey in 2011, the family home accounts for the largest chunk of the fam-
ily wealth, totaling 65% for urban families and 54% for rural families. In this con-
text, a reverse mortgage provides a means for the needy to access income from the
wealth locked away in their family home. In its very basic form, a reverse mortgage
lets the homeowner secure a loan from a financial provider against the equity they
have in their home (Merrill, Finkel, & Kutty, 1994). It provides a means for the
elderly to access the equity in their home while continuing to live in it.
Reverse mortgages have been used to pay for retirement in many developed
countries, including Australia (Ong, 2008a). The clients of reverse mortgages in
Western nations where this facility is available are pensioners with a large housing
asset. They are given the option of receiving one lump sum amount or multiple
payments by borrowing against the equity in their home. This allows the elderly to
collateralize their houses to secure an annuity, the value of which depends on the
value of the houses and the owners’ life expectancy. The program allows the partic-
ipants to routinely draw money out of their property to supplement pension pay-
ment from the government. The program is flexible in that it provides a financial
buffer to those in need. However, reverse mortgages have as yet to gain popularity
in developing countries. The reasons include (a) the lack of maturity of the finan-
cial sector; (b) that the need for reverse mortgages in poor countries is less than in
2
http://www.gov.cn/zwgk/2009-09/04/content_1409216.htm (accessed July 2, 2015).
JOURNAL OF HOUSING FOR THE ELDERLY 3
their rich counterparts, given a relatively young population; and (c) the lack of
secure rights to chattels. China is different with respect to each of these factors.
First, the majority of Chinese have access to the formal financial sector; second,
the population in China is aging rapidly, meaning that room for filial piety is
diminishing; and third, the rights to property are secure, given a strong central
state. But despite the large latent demand for reverse mortgage, there is little
research on the subject in China. Just two studies have reported on the differences
between China and the West where reverse mortgages are used in terms of the
operational environment (Liu, 2009; Qingfen, 2006). Another two papers have
assessed the needs and desires for reverse mortgage in the Chinese market (Chou,
Chow, & Chi, 2006; Ran & Ziwen, 2009). However, no research to date has rigor-
ously examined the impact of the reverse mortgage on the Chinese pensioner and
none has quantitatively estimated how much benefit they could deliver. This article
fills this void by investigating the possibility of using reverse mortgage as a means
to unlocking the wealth in the family home to supplement the pensions in retire-
ment. We use the data from Chinese Household Financial Survey 2011 that covers
persons aged 65 years and above from 25 provinces in China to assess the potential
value of reverse mortgages both to the individual and the Chinese government.
The rest of the article is divided into five sections. The second section provides
the context; the third, fourth, and fifth sections present the data, methodology, and
analysis. The final section provides the implications for policy, and the conclusion
follows.
The context
Social and cultural influences regarding the Confucian value of Xiao, or filial piety,
are key concerns for impeding the use of reverse mortgage in China. Previous
research suggests that most Chinese wish to keep their homes debt-free in old age
in order to bequeath these assets to the next generation (Chou, Chow, & Chi, 2006;
Ran & Ziwen, 2009). In return, the children are expected to take good care of their
parents in their old age. The caring for parents follows from the Confucian obliga-
tion of the children, and this is embedded in China’s moral and social contexts
(Wang & Zheng, 2013).
However, changes in both demography and social norms are weakening the tra-
ditional Confucian family values. First, the dependency ratio is trending up, mak-
ing it hard for the young to support the old, especially among the younger cohorts
born in the 1980s who were influenced by the “one-child policy” adopted in 1979.
The recent “4-2-1 phenomenon” describes the contemporary reality of the high
dependency ratio for the Chinese young generations: that is, a lone child from the
“one-child policy” supporting his or her two parents and possibly another four
grandparents. Similarly, one working couple supports two sets of retired parents
and likely four sets of grandparents. It is estimated by Song (2005) that in 2000,
there were around 92 million one-child families in China, and among them, about
34% were from rural regions and 66% from urban regions. According to Wang
(2009), the number of families with a lone child had increased to 136 million by
2010, increasing by 47% within a decade and expected to continue to grow for the
foreseeable future. The government eased its one-child policy in late 2013 with cur-
rent rules permitting couples to have a second child if either of them is a sole child.
Despite the easing of the one-child policy, at least in the short term, the depen-
dency ratio is likely to continue to trend upward.
Second, the Confucian norms are likely to erode as children migrate away from
their parents in search of work and opportunity. China is experiencing rapid
urbanization. A large number of young people are moving from rural to urban
regions or from inland to coastal cities to access employment. This migration is
leaving behind the majority of the elderly to live away from their children. It is esti-
mated that around 221 million migrants and about 40% of the elderly were living
separately from their parents/children in 2012 (China-Britain Business Council,
2014). This status is even worse in rural areas. According to the China Academy of
Social Science (2013), there were about 99 million elderly people in rural areas
whose children had left them behind to work in the cities. These kinds of families
are referred to as the “empty nests”: Their children have established their own
careers in the cities and have become urban dwellers, leaving their parents to care
for themselves. The massive and ongoing rural-to-urban migration will put contin-
ued pressures on the “empty-nesters.” According to L.-G. Liu (2014), by 2023,
there will be an additional 200 million people migrating to urban areas. The
“empty-nesters” can no longer rely on the Confucian norms of their children
returning to take care of them in old age because of the separation from the jobs
and the costs of raising their own families. They are more likely to choose other
alternatives, rather than complying with providing family-oriented care (Zhang &
Goza, 2006).
In response to the preceding two aspects, the expectation by parents of their
children taking care of them in old age is also changing. According to a survey3
carried out in 2013 by the Southwestern University of Finance and Economics,
among elderly people the willingness to be supported by children has fallen. Some
42% of those born in the 1950s had the expectation that their children will look
after them in retirement, but the figure for those born in the 1980s had dropped to
just 27%. While 46% of those born in the 1950s opted for self-support as a means
to retirement, the corresponding figure for those born in the 1980s was 65%.
In sum, the shifts in social and economic factors has pushed the Confucian
value of Xiao, or filial piety, to change with time. There is a nascent market for
aged care in China, which could potentially be funded through the introduction of
reverse mortgages. The existing reverse-mortgage studies have produced somewhat
mixed conclusions about the extent to which reverse mortgages can improve
3
The China Household Financial Survey (CHFS), see http://www.chfsdata.org/ (access on 07/02/2015)
economic well-being (Ong, 2008a). Next, using the Chinese Household Financial
Survey, we quantify the impact of reverse mortgages on elderly Chinese homeown-
ers and compare the benefits obtained for different groups in society. The model-
ing methodology and data are detailed in the next section.
Data
The data used for the analysis that follows are drawn from the Chinese Household
Financial Survey 2011, which covers elderly people from 25 provinces in China
(Gan et al., 2013). The survey provides rich information on household characteris-
tics, house value, and tenure, all of which are used to estimate the impact of the
reverse mortgage on the income of homeowners in China.
First, the analysis is restricted to household members who are aged 65 years and
older. In the case where there is more than one household member, then the youn-
gest person is selected. If the household members are of the same age, we choose
the female as the candidate for the analysis, given the fact that females have higher
life expectancy. Second, we restrict our sample to urban household members who
have 100% equity in their home to facilitate estimation of benefits. Rural house-
holds are excluded because of the underdeveloped status of housing and financial
markets there. The third and final simplification is that the property value used is
as reported by the respondents. Unfortunately, there is no comparable literature in
China to evaluate the accuracy of households’ reported values of their houses
(Wang, 2011). We note that our estimate may be biased upward because of using
self-revealed valuations of family homes.
Applying the already-mentioned criteria leaves 949 elderly (i.e., aged over 65
years) urban households for subsequent analysis. The mean house value for these
households is RMB <618,862 (1 USD 6.31951466 RMB on January 19, 2018),
and the mean household annual income is RMB <56,331. Table 1 describes the
distribution of housing value and annual household income. Nearly 74.3% of the
elderly homeowners have an annual income of under RMB <60,000 and 84.8%
under RMB <80,000. In terms of value, around 10.5% of the homes are under
RMB <500,000 and 59.35% have a valuation of over RMB <2,000,000. Further-
more, home values are positively correlated with household income (correlation
coefficient of 0.16). The positive correlation can also be seen in Table 2, where we
Table 1. The household income and the mean of housing value.

Annual household income (RMB) Number of households Percent (%) Mean housing value (RMB)
20,000 272 28.7 326,568

20,001–40,000 243 25.6 537,332
40,001–60,000 190 20.0 567,007
60,001–80,000 100 10.5 867,026
80,001–100,000 50 5.3 941,240
100,001 94 9.9 1,344,739
Total 949 100 618,862
Note. 1 USD 6.31951466 RMB on January 19, 2018.

Table 2. The annual household income and housing value.

Annual household income (RMB) Mean housing value (RMB)
20,000 327,525
20,000–40,000 537,332
40,000–60,000 567,007
60,000–80,000 867,026
80,000–100,000 941,240
100,000 1,344,739
group the households based on their income. With the increase of the household
income, the mean value of the house increases from RMB <327,525 for house-
hold with annual income lower than RMB <20,000 to RMB <1,344,739 for
household with annual income higher than RMB <100,000.
Table 3 shows the mean housing value and household income by household
age and marital status. We split the sample into three groups based on age:
from 65 to 69, from 70 to 74, and older than 75 years. The couple households
account for 67% of the total sample, single males 9% and single female 24%.
Couple households have the highest mean income (of RMB <60,420) and live
in houses with the highest value (RMB <629,431). In contrast, single-member
households have a mean income of RMB <47,333 for males and RMB
<48,230 for females, both of which are about two-thirds of the income of
couple households. The single households also have less mean housing value,
Table 3. The mean household income and housing value by household age and marital status.
Age 65–69 years Age 70–74 years Age 75 years Total
Couple
Number of house owners 327 159 151 637
Row % 51% 25% 24% 100%
Column % 85% 69% 45% 67%
Mean income (RMB) 60,336 55,444 65,843 60,420
Mean housing value (RMB) 537,446 735,292 717,162 629,431
Single male
Row % 13% 21% 66% 100%
Column % 3% 8% 17% 9%
Mean income (RMB) 60,249 59,266 41,072 47,333
Single female
Row % 21% 24% 55% 100%
Column % 12% 23% 38% 24%
Mean income (RMB) 56,256 64,676 38,107 48,230
Total
Row % 41% 24% 35% 100%
Column % 100% 100% 100% 100%
Mean income (RMB) 59,835 57,900 51,191 56,331

with RMB <550,158 for single male and RMB <615,215 for single female
households.
Because the level of housing prices and household income are likely to be associ-
ated with the local economic status, we divided the 22 provinces into three regions
according to their level of per-capita gross domestic product (GDP). Region 1
comprise provinces located in eastern China with GDP per person exceeding RMB
<40,000; this includes Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Guangdong,
Liaoning, and Shandong. Region 2 comprises provinces located in the middle of
China with GDP per capita between RMB <30,000 and <40,000; it includes Jilin,
Chongqing, Hubei, Hebei, Heilongjiang, and Shanxi. Region 3 comprises provinces
located in western China with GDP per capita less than RMB <30,000; it includes
Hunan, Qinghai, Henan, Jiangxi, Sichuan, Anhui, Gansu, and Yunnan. Table 4
shows the distribution of household income and housing value by region. In gen-
eral, households with the highest housing value and income are concentrated in
Region 1, while those with lowest housing value are concentrated in Region 3. For
example, the mean housing value in Region 1 (of RMB <915,020) is nearly five
times that in Region 2 and Region 3. Meanwhile, the mean income of households
from Region 3 (of RMB <38,396) is nearly half of that in Region 1 but similar to
that in Region 2.
Methodology
In this section, we calculate the maximum amount a household could receive each
month if it enrolled in the reverse mortgage program. The reverse mortgage
Table 4. The household income and housing value by different regions.

Region 1
Row % 52% 25% 23% 100%
Column % 38% 40% 51% 41%
Mean income (RMB) 80,429 76,011 63,037 72,803
Mean housing value (RMB) 822,247 1,109,616 878,062 915,020
Region 2
Row % 58% 27% 15% 100%
Column % 25% 26% 20% 24%
Mean income (RMB) 33,842 32,420 30,946 32,473
Region 3
Row % 60% 25% 15% 100%
Column % 38% 35% 28% 35%
Mean income (RMB) 41,072 33,694 36,893 38,396
Total
Row % 56% 25% 18% 100%
Column % 100% 100% 100% 100%

payment stream is estimated using an equity conversion mortgage program from

the literature. In its simplest form, a reverse mortgage scheme is an unwinding of
the more traditional mortgage with the safeguard that the housing value does not
erode below zero at the end of the loan tenure (i.e., within the lifetime of the bor-
rower). Such a safeguard is often funded with insurance, safeguarded through reg-
ulation, and is deemed essential as the elderly without income cannot face the risks
of eviction in their dying days. Borrowers can choose to receive the reverse mort-
gage payments as a lump sum or as a regular payment, or a combination of the
two. Here we only calculate the options by which participants receive monthly pay-
ments. The parameters used are drawn from the literature and adapted to the Chi-
nese context.
Following Ma and Deng (2011), the monthly payment from a reverse mortgage
takes the form
NBL
MP D XN (1)
1
t
t D 1 ð1 C rÞ
where MP is the monthly payment of reverse mortgage, and r is the interest rate
(0.46%), which equals 1/12th of the rate on a 10-year treasury bond (of 4.06%) plus
the lender’s margin of 1% and mortgage insurance premium of 0.5% (Ong, 2008b).
NBL is the net borrowing limit and N is the expected life expectancy of the partici-
pant. We calculate the expected life expectancy as 100 years minus the age of the bor-
rower at the beginning of the loan (Rodda, 2000). According to Ma and Deng (2011),
the net borrowing limit (NBL) as shown in Equation (2) is equal to the house value
multiplied by the loan-to-value ratio (LTV) (Equation (3)) minus the initial fees (C)
for the application for a reverse mortgage, including third-party charges, origination
fee, and service fee (assumed to equal 3.5% of housing value). Thus,
NBL D H0 LTV ¡ C (2)
The loan-to-value ratio is calculated by using Equation (3) based on Ma and

Deng (2011):
LTV D HN =½H0 ð1 C r ÞN (3)
where HN is the expected future housing value when the reverse mortgage con-
tract expires. We calculate HN drawing on Szymanoski (1994). That is,
HN D H0 emt C 0:5s
2
t
(4)
where mt is the average of the expected annual rate of appreciation in the price of
houses, and s is its standard deviation. We follow Li and Chand (2013) and use
the trend growth rate of housing prices to represent the expected future housing
price growth rate. The data come from the China Statistics Yearbook 1998–2016.
The trend term is isolated by a bandpass filter method, and finally we get m ( D
0.12), and the standard deviation s ( D 5.64%).
Findings
The model generates a range of results on reverse mortgage payments for the
elderly in our sample. We use these results to identify particular groups most likely
to be benefit from the reverse mortgage program. Table 5 illustrates the increase in
monthly household income after enrolling in the reverse mortgage program, by
age and home value. On average, the elderly homeowner receives a monthly RMB
<1,383 reverse mortgage payment, and with this payment, total monthly income
increases by RMB <1,388 or 29%. This increase is substantial, but, as shown in the
rest of the tables, the gains are not spread evenly across all elderly groups.
A strong housing value effect dominates, as shown by the steep increase in the
payments received. For example, households with the lowest housing value (i.e.
RMB <500, 000) receive the maximum of RMB <400 per month from a reverse
Table 5. Monthly payments under the reverse mortgage program and its impact on household
income level.
Age 65– Age 70– Age Total by housing
69 years 74 years 75 years value
Housing value RMB <500,000

Monthly reverse mortgage payment (RMB) 174 251 780 400
Monthly household income before reverse 4,234 3,468 2,768 3,551
mortgage (RMB)
Total monthly income 4,408 3,719 3,552 3,955
Increase % 4.11 7.25 28.30 11.37
Housing value RMB <500,000–1,000,000
Monthly reverse mortgage payment (RMB) 688 980 2,431 1,369
mortgage (RMB)
Increase % 9.89 18.85 53.29 24.09
Housing value RMB <1,000,000–2,000,000
Monthly reverse mortgage payment (RMB) 1,361 1,987 4,767 2,709
mortgage (RMB)
Increase % 24.08 32.89 42.43 35.19
Housing value > RMB <2,000,000
Monthly reverse mortgage payment (RMB) 2,837 4,632 22,787 11,100
mortgage (RMB)
Increase % 29.60 36.05 289.76 109.13
Total by age group
Monthly reverse mortgage payment (RMB) 468 934 2,777 1,383
mortgage (RMB)
Increase % 9.39 19.37 64.81 29.47

mortgage program, which increases their total income by 11%. In contrast, house-
holds with middle-level valuation (RMB <500,000–1,000,000) receive RMB
<1,369 from a reverse mortgage program, which increases their total monthly
income by 24%. Households with the highest housing value (between RMB
<1,000,000 and 2,000,000) receive RMB <2,709 from a reverse mortgage program,
which raises their income by 35%. Those with housing value exceeding RMB
<2,000,000 obtain RMB <11,000 in reverse mortgage payments and their total
monthly income increases by 109%.
As is evident, the monthly payment of the reverse mortgage also increases with
age. This is consistent with the fact that older households obtain higher reverse
mortgage payments because of their reduced life expectancy (Ong, 2008b). Youn-
ger households with age between 65 and 69 years receive about RMB <468 per
month from a reverse mortgage program, compared to RMB <934 for households
in the 70 to 74 years age bracket and RMB <2,777 for those aged over 75 years.
The reverse mortgage program increases the total household monthly income for
the 65 to 69 years cohort by 30%, while the corresponding figure for those aged
between 70 and 74 years old is 19% and for over 75 years is 64%. In sum, the group
that benefits the most from a reverse mortgage is those older than 75 years and
with a high home value.
Estimates by income groups as shown in Table 6 indicate that reverse mortgages
could particularly benefit the households with lower income. Those with annual
household income less than RMB <40,000 receive a monthly payment of RMB
<805 in reverse mortgages, which equals an increase in their total monthly income
of 52%. However, for households with high annual income (>40,001), a reverse
mortgage increases their household income by less: that is, 24% for those with
annual income between RMB <40,001 and RMB <60,000, and 25% for those with
annual income over RMB <60,000.
Table 6. Reverse mortgage payout by household income.

Annual household income (RMB) Value
40,000
Monthly reverse mortgage payment 805
Monthly household income before 1,557
Total annual income 2,366
Increase % 51.96
40,001–60,000
Monthly reverse mortgage payment 990
Increase % 24.01
>60,001
Monthly reverse mortgage payment 2,894
Increase % 24.59

Table 7. Reverse mortgage payout by household type.

Household type Value
Single family
Total monthly income 5,443
Increase % 35.23
Couple family
Total monthly income 6,414
Increase % 27.24
Table 7 illustrates the reverse mortgage payments among the different house-
hold types according to their marital status: couples or single-member households.
Clearly, the single-member households are most likely to benefit from reverse
mortgage program compared with couples. The finding are similar to those from
the United States, the United Kingdom, and Australia (Merrill, Finkel, & Kutty,
1994; Ong, 2008b; Venti & Wise, 1991). For the single-member households, the
reverse mortgage helps them raise their income by 35%, while the corresponding
figure for couple family is 27%.
Housing value varies by regions; thus, the reverse mortgage payouts are likely to
include regional differences. Table 8 shows the distribution of reverse mortgage by
region and age. In general, households with the highest housing value are concen-
trated in region 1, while those with lowest housing value are concentrated in region
3. For example, mean housing value in region 1 (of RMB <917,136) is nearly five
times that in region 2 and region 3. Meanwhile, the elderly household in region 1
with relatively high housing value benefits most from the reverse mortgage with a
Table 8. Reverse mortgage payout by region.

Region 1
Mean housing value 822,247 285,630 213,213 917,136
Mean monthly income (RMB) 6,702 6,334 5,294 6,085
Monthly reverse mortgage payment 699 1,439 4,031 2,127
Total monthly household income 7,402 7,774 9,326 8,212
Increase % 10% 23% 76% 35%
Region 2
Mean housing value 110,961,6 181,080 211,357 242,658
Monthly reverse mortgage payment 249 227 841 442
Increase % 9% 8% 32% 16%
Region 3
Mean housing value 883,369 239,391 252,510 223,968
Monthly reverse mortgage payment 180 254 804 371
Increase % 5% 9% 26% 12%

gain of 35%, compared to the other regions, which experience gains of 16% for
region 1 and 12% for region 3.
Conclusions
China is experiencing a rapid aging of its population where the elderly will be
seeking means to pay for their retirement. The state provides a pension to the
elderly, but this is likely to prove insufficient. The substantial increase in the
population of retirees within the next half a century will put undue pressures
on the fiscal and health care systems. It is estimated that if no further actions
are taken soon, an unsustainable deficit in the pension system will emerge:
The annual pension deficits by 2050 on current projections will amount to
95% of the total annual GDP (Bloom, 2011). In order to relieve the govern-
ment of this fiscal burden and provide safety nets for the elderly, the Chinese
government launched a pilot reverse mortgage program in July 2014 in four
major cities to draw lessons from both within the cities and from Western
countries. Here we quantify the potential users of and their benefits from a
reverse mortgage scheme by drawing on survey-level data for the elderly Chi-
nese. To the best of our knowledge, this is the first quantitative analysis of the
potential benefits from a reverse mortgage program in China.
There is considerable debate on the acceptability of reverse mortgages in China.
Some argue that reverse mortgages are contrary to the Confucian ideas of children
looking after their parents in old age, which are deeply imbedded in society (Chou,
Chow, & Chi, 2006). The elderly in return pass their homes to the next generation,
thus contributing to the building of family wealth. This implicit agreement is
enforced through social norms embedded within the Confucian contract. The
Confucian contract may not be relevant for many anymore. Many young have
emigrated to urban centers for employment, having left the elderly at home. They
may not be able to return in time to fulfill their Confucian obligations. The one-
child policy, moreover, has left a few with a heavy burden of supporting two
parents and possibly four grandparents. They may in return acquire two houses
but may not have the income to support the two additional households plus their
own. Finally, Chinese society is shifting toward the elderly choosing to live inde-
pendently as self-funded retirees.
The challenge as argued in this article is to enable income-poor pensioners who
have considerable wealth tied up in their family home to access this to supplement
their existing state pensions. Reverse mortgages provide such an option and one
that some Chinese may be ready to accept. Our estimates suggest that single-mem-
ber elderly households on a low income with homes of moderately high value have
the most to gain from reverse mortgages, a conclusion similar to those of Nakajima
and Telyukova (2017). At least for them the demand for a reverse mortgage already
exists in the marketplace. Their household income could be significantly increased
by means of a reverse mortgage.
We have excluded rural households from our analysis for two reasons: (a) The
real estate market and access to finance within rural districts remains rudimentary;
and (b) many rural families may not need reverse mortgages, given the fact that
they often have more than one child, meaning that the Confucian norms of chil-
dren taking care of their parents in old age in return for the family home or family
farm being bequeathed to them may still remain valid. There indeed is a vulnerable
group of rural elderly (empty nesters) who may not be able to access reverse mort-
gages at all. For this group the state would have to provide a safety net. Alterna-
tively, the issuance of secure rights to land property will enable these folks to
utilize reverse mortgage to supplement their retirement income.
The analysis presented here is the beginning of a debate on the applicability
of reverse mortgages in China and is far from being complete. We have relied
on three key assumptions. First, the modeling of the reverse mortgage pay-
ments is based on the life expectancy of the female member of the household,
since females are expected to live longer than males (and modeled to have a
life expectancy of 100 years). Second, we have assumed that the value of
houses appreciates at a fixed rate of 12% each year. Third, the current value
of homes is as reported by the owners is used in modeling the level of pay-
ments received from a reverse mortgage. On the first, females have a longer
life expectancy than males and that of 100 years is drawn from the literature.
The second assumption is problematic for China, given the anticipated fall
in the population of workers, which may reduce the demand for housing.
While the preceding may be true for the nation as a whole, the emigration to
urban areas and the shortage of houses therein provide reasons for comfort
on the assumed rate of appreciation of house prices. Finally, owners are
known to inflate the prices of their possessions, thus biasing the modeled
gains from reverse mortgages upward. Nonetheless, the percentage gains are
so large that the upward bias in valuations would have to be equally large to
negate the qualitative conclusions from the reported analysis.
In sum, reverse mortgages provide a means to unlocking the wealth in
residential housing to fund retirement for the many Chinese who will pay for
their retirement purely from savings. The cultural constraints and the Confu-
cian norms of family-funded pensions are eroding and may not be sustainable,
given the rise in the population of the elderly compared to the working-age
population. The state may not be in a position to provide pensions, given
the increasing bulge in the population of retirees and a trend likely to continue
for the foreseeable future. Thus, there is little option other than reverse mort-
gages that policymakers can look to. If this is indeed the case, then it is time to
develop a clear and transparent legal framework to protect both borrowers and
lenders that makes a market for reverse mortgages. This will demand further
maturation of the financial sector, including the development of an insurance
industry able to market risks such as to collateral, interest rates, and life expec-
tancy of the borrowers. A reverse mortgage program is both an opportunity for
reform to the pension system and a challenge to the cultural/Confucian beliefs

on the obligations of children to their elderly parents.
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Unlocking Housing Equity For Pensions in Urban China

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Journal of Housing For the Elderly

ISSN: 0276-3893 (Print) 1540-353X (Online) Journal homepage: http://www.tandfonline.com/loi/wjhe20

Unlocking Housing Equity for Pensions in Urban

Qiang Li & Satish Chand

To link to this article: https://doi.org/10.1080/02763893.2018.1451797

Published online: 06 Apr 2018.

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Unlocking Housing Equity for Pensions in Urban China

Table 1. The household income and the mean of housing value.

20,000 272 28.7 326,568

Note. 1 USD 6.31951466 RMB on January 19, 2018.

Table 2. The annual household income and housing value.

Note. 1 USD 6.31951466 RMB on January 19, 2018.

Note. 1 USD 6.31951466 RMB on January 19, 2018.

Table 4. The household income and housing value by different regions.

Note. 1 USD 6.31951466 RMB on January 19, 2018.

payment stream is estimated using an equity conversion mortgage program from

NBL D H0 LTV ¡ C (2)

The loan-to-value ratio is calculated by using Equation (3) based on Ma and

LTV D HN =½H0 ð1 C r ÞN (3)

Housing value RMB <500,000

Note. 1 USD 6.31951466 RMB on January 19, 2018.

Table 6. Reverse mortgage payout by household income.

Note. 1 USD 6.31951466 RMB on January 19, 2018.

Table 7. Reverse mortgage payout by household type.

Note. 1 USD 6.31951466 RMB on January 19, 2018.

Table 8. Reverse mortgage payout by region.

Note. 1 USD 6.31951466 RMB on January 19, 2018.

reform to the pension system and a challenge to the cultural/Confucian beliefs

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