Prof Hazel Bateman - UNSW, Centre of Excellence for Population Aging Research
Baby Boomers and their Home Equity
Shelley Wettenhall: It’s my pleasure to introduce Hazel Bateman to our Third Pillar Forum today. Hazel is the Chief Investigator and Deputy Director of ARC Centre of Excellence in Population Aging Research. Hazel is also a professor in the School of Risk and Actuarial Studies at University of New South Wales in Sydney. She has expertise in pension economics, behavioural retirement insurance and life cycle finance. Her current research concentrates on issues in financial services, and she also works on design of, and demand for retirement products. Hazel works closely with the financial services industry, super funds and policy makers in Australia and internationally, and has consulted to international organizations, including the World Bank and the OECD. Welcome, Hazel.
Hazel Bateman: Thank you very much. Well, I’m very pleased to talk to you this afternoon about behavioral barriers to reverse mortgage demand in Australia. So we know that most Australians have a portfolio of assets for retirement provision, and if we look at Australian homeowners, aged 60 to 80, in fact, only 10.5% of their total assets is in super, and over 61% of assets is in their housing and 28% of their assets is in other financial assets. Yet the narrative about retirement provision is very narrow. The focus is generally on superannuation balances to fund retirement. And we only have to look at the current debate about whether the SG should be raised to 12%. The debate tends to be, “Is super enough for retirement and perhaps the age pension?” But also consider the ASFA budget standards. These talk to us about a modest or comfortable lifestyle, but they really just consider regular day-to-day expenses, which you can fund out of your super. The exceptions, of course, are those of us in the know. So those in academic life, in the financial services industry, policy makers, we understand that this is border and this is reflected in the retirement income review.
There’s also the pension loan scheme, which suggests that housing can be used for retirement. But both the retirement income review and the pension loan scheme have a very low profile for the general public. So the use of household wealth to fund retirement currently is largely just super draw down using account-based pensions. Academic research, much of my research, has revealed barriers to more extensive use of household wealth and products. I think first and foremost is lack of awareness. Many people, many retirees just don’t know what products are available or what strategies they could use. There’s also product complexity, whether that’s actual or perceived. And importantly, there’s behavioral impediments. We know that people tend to use mental accounts and they may think about housing as something for a bequest, super for something to spend and financial assets as something for emergencies or precautionary saving.
There’s also a very narrow view of consumption needs, and I think this is emphasised by things such as the ASFA budget standards, which get people to think about just their day-to-day expenses and not other needs they may have through their whole retirement. So what we do is study behavioral barriers to reverse mortgage demand in Australia, and we do this by eliciting the state of demand for a reverse mortgage product, which in our study we call an equity release product to get around the negative perceptions people may have of the name “reverse mortgage”. And we undertake this study to just under a thousand Australian homeowners aged 60 to 80 and we quote to an age, gender, and location, urban, regional to make sure we have a representative sample. We ask our participants to complete an online questionnaire comprising a reverse mortgage choice task and survey questions.
Now importantly, we want to investigate behavioral impediments. And so we put our participants into five treatment groups. The first treatment group is our control. These people just receive a product description. And then we give another group a case study to address product complexity. And then we have three treatment groups where we try to address the behavioral barriers. So one has information framing to address mental accounting, another has information framing to address the narrow consumption framing, and a final treatment includes both of those mental accounting and narrow consumption frames.
What do we find? We find that on average, 42% of our survey participants stated that they would take a reverse mortgage, using an average of 13% of their housing equity. Now did we find differences by our treatment groups? Importantly, we find that treatment groups which had information provision that tried to offset people’s mental accounting, resulted in the highest take up of the reverse mortgage product. What else did we find? So we undertook regression analysis and this confirmed the importance of addressing mental accounting. So we found that the state of demand for reverse mortgages, which we called an equity release product was positively associated with not having a mental account mindset with respect to household wealth. Because we ran a survey, we could also collect a lot of other information about people, and so we found that stated demand for reverse mortgage was associated with having low non-housing wealth, which is what we would expect. Having a long life, people who expect to live a long time relative to the life tables were more likely to have a positive demand for reverse mortgage.
People who had a reverse mortgage, of course, were positively… Stated positive demand, and people who didn’t perceive the product features to be unattractive, so people who understood some of the positive aspects of a reverse mortgage. And because we ran the survey in the time of COVID, people who expected COVID to impact on their health, well-being and finances were also more likely to state a positive demand. Now, for those people who said they would demand the product, there was significantly higher housing assets released in the treatments where information framing offset mental accounting. This was a very strong result, very highly significant. And so we found in this study, if we can present information to people where we emphasize to them that they can use the whole of their household portfolio, including the housing, their super and their financial assets to fund their retirement, people were much keener to release their housing assets in form of a reverse mortgage to fund their retirement.
Again, not having a mental accounting mindset with respect to household wealth was important, and then we also found some very important results in relation to household assets and income. So people with loan on housing wealth… So people who had a house but loan on housing wealth were more likely to take out more of their housing wealth as a reverse mortgage. People with low and moderate house value, so not people with very… Not people in the top quartile of house value, they were probably more able just to take care of themselves, but people with low or moderate house value were likely to take more of this product. And as we expect, people with low or moderate income were more likely to take out more housing assets with the reverse mortgage.
Again, people who expected to live a long time were more… They would take more of their housing assets, people who didn’t perceive the product features to be unattractive, and again, in our COVID time, people who expected a COVID impact on their health, well-being and finances were more likely in this experiment to take out a higher proportion of their housing assets. So what are the implications of this study? Well, as you can see, the stated demand was substantially greater than actual demand. The stated demand in our sample, 42% of our sample said that they would take a reverse mortgage. I think this highlights the importance of product awareness and efforts to address complexity. In the experimental sense, we make people aware of the product, we put the product in front of them on a screen and we force them to read the screen by putting a timer on the screen. We teach people about the product by explaining the product in simple terms. We give a case study so people can understand the implications of the product, and I think this is a very important implication for the real world. We can’t assume that people understand the products and strategies that are given to them at retirement. In the analysis of information framing, our study highlights the importance of strategies to offset mental accounting.
We emphasize several times in our information framing, the importance of thinking about one’s entire household portfolio. In the analysis of participant characteristics, we saw the importance of the asset rich but income poor, demanding more of the product. And people who expected to live a long time, demanding more of the product and people who are comfortable with the product features. Puzzles for further attention, as I mentioned earlier, we also tested with the broad consumption where the framing broad consumption needs would have an effect and we didn’t find a significant effect with our consumption framing and this was probably contrary to our hypothesis at the beginning of the experiment. So we want to investigate this a little bit more. We also found that the demand for the product was associated with high risk tolerance, which suggests to us that people perceive this product to be a risky product than a risk management product.
Now, I found this result in analysis of other products as well. I’ve done work on life annuities and long-term care insurance products, and we find similar results. And I think we need to make sure that we communicate to people that these products are all about risk management in retirement, rather than putting people into risky products. So thank you very much for your attention. We have a working paper which is in progress, which will probably be finished in a month or two, and the names and contact details of the four authors of that project are on the page in front of you. So thank you very much.
Josh Funder: And I do have a question for you on that presentation, but firstly, a note of thanks. The academic research on accessing a variety of forms of home equity historically has focused almost always on the financial details and the financial structure of the product, and Hazel actually leads in understanding… Providing information and reducing complexity, how people actually receive and understand their options and the human and behavioral side of home equity access. And it’s leading research that actually is absolutely essential because that’s the limiting factor in people drawing on their third pillar. Hazel, in terms of awareness, complexity and in behavior and providing enough information for people to have confidence in their choice, some of the other contributors to this panel have noted a clear shift over the last decade in making sure that this isn’t a risky product, but how do we then get awareness of all that and increased openness to it and providing information about that.