China Tries Reverse Mortgages

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% in 2018. And yet, for many Chinese, pensions are pitifully small as it is: By one estimate, they average only about 1,400 yuan, or $200, 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, or about $170,000, in home equity. A Chinese retiree at 60 would have an average of 15 years ahead. Assuming he took an annual payment of 75% of urban disposable income, this would consume roughly 400,000 yuan, or about $60,000, 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% 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!”

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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.”