The elderly home equity puzzle: the demand for mortgage debt

This thesis focuses on the question whether the elderly home equity puzzle can be explained by passive saving behavior in the Netherlands. It is shown that homeownership and home equityincreased gradually in the past decades. Among the elderly the market share of interest-only mortgages increased to over 80% in 20 years. This suggests that households stop accumulating capital by paying off mortgage debt. Instead, they let their capital accumulation depend on house price developments. This is a signal for (indirect) capital decumulation among the old by using mortgage debt as instrument. The model of Brueckner (1994) for mortgage demand is presented and empirical (instrumented variable and tobit) estimations are done. The results show a negative effect of age on mortgage demand. Therefore it seems that elderly tend to not using home equity for nonhousing consumption at old age. This suggests a contradiction to thestandard lifecycle theorem, even in a country where the precautionary savings motive is expected to be small (due to small expected health costs and a generous pension scheme). Additionally, apanel study based on synthetic age cohorts is done (Deaton, 1985) in order to assess activity (or refinancing) in the demand for mortgage debt. It appears that elderly do not actively increase mortgage debt, but prefer to (indirectly) decumulate home equity by changing the type of mortgage to a cheaper or interest-only mortgage.