Housing Wealth Dissaving Choices of Indian Urban Homeowners in Later Life: Influence of Uncertain Life Span and Demographics

By Gupta, Sarita; Kumar, Sanjay | IUP Journal of Applied Finance, October 2018 | Go to article overview

Housing Wealth Dissaving Choices of Indian Urban Homeowners in Later Life: Influence of Uncertain Life Span and Demographics


Gupta, Sarita, Kumar, Sanjay, IUP Journal of Applied Finance


Introduction

Research on the elderly has attracted the attention of a number of economists, stimulated by demographic change. Around the globe, the share of the elderly (aged 60 or over) increased from 9.2% in 1990 to 11.7% in 2013 and projected to reach 21.1% by 2050, resulting in population ageing. This demographic change will have a substantial impact on the world economy and the society. A sharp increase in the proportion of older or retired population with a shrinking working age population is expected to put pressure on capital markets and social institutions. With a rising share of older people, the social security system will have difficulty in meeting its larger obligations from a smaller tax base. Later life consumption of older people is generally financed either through their personal savings, family support or through social security measures. Globally, it is a matter of substantial interest as to how older people will finance their post-retirement life in the absence of shrinking social security provisions and family support. Fiscal deficit eventually results in shattered social security net which forces elders to manage the retirement life by private funds. United Nations Population Fund (UNPF) (2017) reports that in India too, the share of aged population rose from 7.5% in 2001 to 8.6% in 2011 and is projected to touch 19% in 2050. Thus the opportunity of demographic dividend is transforming itself into demographic challenge.

According to Venti and Wise (1991), across the world, housing asset is regarded as the most valuable asset, which holds almost the biggest share in the total wealth portfolio of the aged. Under the circumstances of liquidity constraintment of older homeowners, housing wealth is viewed as a source to secure life after retirement by policy makers and government; hence, leading research is directed towards investigating how older homeowners look at their home equity. How retired or older homeowner envisioned accumulated housing wealth during their later life? Standard life cycle theory recommends that older homeowner will trade down or dissave home equity with an aim to smooth future consumption. However, precautionary motives may bind elderly to augment or hold housing wealth rather than dissaving it.

Housing decisions are of extreme importance for any age group, but they seem to be most striking to older homeowners when it comes to dissave/decumulate housing wealth. Jones (1997) attempts to put forward the reasons as to why older homeowners may choose to trade down their housing wealth. Yarri (1965) opines that trade down decision is related to life cycle hypothesis, which proposes that in the event of economic adversity, an individual may consume the accumulated housing wealth to maintain his/her level of consumption over the life cycle. Another set of explanation by VanderHart (1994) includes those factors that are non-economic in nature, and those conditions which stimulate older homeowners to decumulate home equity even in the absence of liquidity constraint. Change in the housing size due to divorce or death of spouse, health deterioration or wish to stay with children may force elderly homeowners for housing transition. Housing wealth decumulation choices encompass selling and downsizing, moving to rented home and opting for a reverse mortgage loan.

Housing wealth dissaving choices of elderly homeowners are diverse and complex. A number of factors make the decision complex. Before considering housing trade down choice, the elderly must look at financial factors like retirement income, assets, debts, future housing expenses, cost of moving, etc. Apart from economic consideration, proper weight should be given to demographic aspects like age, presence of spouse, health conditions, living arrangement, presence of children, etc. Further, uncertain lifespan makes housing decumulation decision more complex. Home is not only a physical place to reside, but a bunch of psychological and emotional remembrance too. …

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