Essays in Real Estate Research Band 15 Nico B Rottke · Jan Mutl Hrsg Thomas Müller Essays on Housing and Pensions A European Perspective Essays in Real Estate Research Band 15 Series editors N B Rottke, Frankfurt a M., Germany J Mutl, Wiesbaden, Germany Die Reihe „Essays in Real Estate Research“, herausgegeben von Professor Dr Nico B Rottke FRICS und Professor Jan Mutl, Ph.D umfasst aktuelle Forschungsarbeiten der Promovenden der Lehrstühle und Professuren des Real Estate Management Institutes der EBS Business School Forschungs- und Lehrschwerpunkte des Institutes bilden die interdisziplinären Aspekte der Immobilientransaktion sowie die nachhaltige Wertschöpfungskette im Immobilienlebenszyklus Die Kapitalmärkte werden als essenzieller Bestandteil der Entwicklung der Immobilienmärkte aufgefasst Die in der Regel empirischen Studien betrachten transaktions- und kapitalmarktnahe Themenbereiche aus dem Blickwinkel der institutionellen Immobiliengewerbe- und -wohnungswirtschaft, wie bspw Finanzierung, Kapitalmarktstruktur, Investition, Risikomanagement, Bewertung, Ökonomie oder Portfoliomanagement, aber auch angewandte Themen wie Corporate Real Estate Management, Projektentwicklung oder Unternehmensführung Die ersten 11 Bände der Reihe erschienen bis 2014 auch im Immobilien Manager Verlag, Köln The series “Essays in Real Estate Research”, published by Professor Dr Nico B Rottke FRICS and Professor Jan Mutl, Ph.D., includes current research work of doctoral students at the chairs and professorships of the Real Estate Management Institute of EBS Business School The research and teaching focus of the Institute constitutes the interdisciplinary aspects of real estate transactions as well as the sustainable value creation chain within the real estate life cycle The capital markets are regarded as essential components of the development of the real estate markets The mostly empirical studies consider transactional as well as capital market topicsfrom the point of view of the institutional commercial and residential real estate industry, such as finance, capital market structure, investment, risk management, valuation, economics or portfolio management, but also applied topics such as corporate real estate management, real estate development, or leadership issues in the property industry The first 11 volumes of the series appeared up until 2014 in Immobilien Manager Publishing, Cologne, as well More information about this series at http://www.springer.com/series/13911 Thomas Müller Essays on Housing and Pensions A European Perspective With a Foreword by Professor Dr Nico B Rottke and Professor Jan Mutl, PhD Thomas Müller Real Estate Management Institute EBS Universität für Wirtschaft und Recht Wiesbaden, Germany Doctoral Thesis, EBS Business School, EBS Universität für Wirtschaft und Recht, Wiesbaden, Germany, 2018 ISSN 2570-2246 ISSN 2570-2254 (electronic) Essays in Real Estate Research ISBN 978-3-658-24955-7 (eBook) ISBN 978-3-658-24954-0 https://doi.org/10.1007/978-3-658-24955-7 Library of Congress Control Number: 2018965574 Springer Gabler © Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2019 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations This Springer Gabler imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH part of Springer Nature The registered company address is: Abraham-Lincoln-Str 46, 65189 Wiesbaden, Germany To my daughter Lilly, who will inherit our present decisions Foreword Covering topics of relevance and proposing solutions are the key drivers of successful scientific works in social sciences Our publication series “Essays in Real Estate Research” welcomes relevant topics that are able to create an impact The present publication is highly relevant as it touches upon a subject which concerns us all: How to secure adequate pensions in an aging society Since the shift in age structure as the main driver for increasing pension expenditures is not easily reversible, we will face an enormous challenge when trying to ensure adequate pensions for current and future pensioners As most of the European pension systems are established as so-called PAYG systems, current workers finance current pensioners An increasing share of pensioners puts inevitably a greater financial burden on current workers Without further compensation, an aging society will soon suffer from income losses This effect of the demographic change is well known and its consequences long debated, but a satisfying solution is not yet implemented in future pension policies The loss of adequate pensions for most of the European elderly is still imminent European governments are struggling with serious solutions as their largest voter potential consists of pensioners or workers just before retirement, e.g., the large cohort of the baby boomer which will retire in the near future But if we are not honest with ourselves, accept these future challenges, and implement sound solutions, taken actions can only treat the symptoms instead of contributing to fundamental changes Looking at the asset distribution within a society rather than at the income distribution when assessing pension adequacy, as this work proposes, is an innovative solution Assets can be income-producing as well, whether in kind or in cash Focusing on housing as the most valuable asset in a European household portfolio is straightforward The author shows that income derived from housing can help to alleviate financial distress in old age Providing access to housing and thus enabling households to accumulate housing wealth must be a crucial policy goal for all European member states It cannot be taken for granted, as inter- and intra-generational differences in housing wealth show already existing inequalities These result from a progressing segmentation of the housing market and individual income and borrowing constraints, reasons that can be addressed in policy measures In that, a well-directed housing policy is essential for a successful welfare policy In his empirical work, the author clearly demonstrates that homeownership is already part of a household’s welfare planning Income from housing is an accepted and applied supplement for public pension income With more and more pressurized pension systems ahead, one conclusion is obvious: Future pensioners will have to rely VIII Foreword on the value inherent in their assets Furthermore, they have to be enabled to release this value in old age This insight is crucial for European legislators as a basis for a well-reasoned housing and pension policy with regard to future pension needs of European elderly The present work is able to create an impact by providing concrete policy suggestions as a result of a sound analysis regarding the importance of housing wealth in the European household portfolio It can give European policy makers food for thought and inspire their work It is in their hands to create more sustainable and adequate pension systems Professor Dr Nico B Rottke Professor Jan Mutl, PhD Preface The demographic change in Europe is a mega trend that is formative The longer its drivers prevail, the stronger will be its effect on our political, social, and economical life The resulting change in the age structure of the European population calls for consequences in many fields Therefore, research on the effects of this mega trend is especially valuable to our society In combination with proposed solutions it is even more valuable Adaptations to a changing environment are the task of current generations to secure living conditions of future generations The aim of this thesis is to contribute to intensified discussions on securing adequate pensions in an asset-based welfare system It puts housing as a central pillar Therefore, it gives an answer to one of the most pressing questions that current generations have to answer: How to provide adequate retirement income for the elderly? This thesis was only possible with the kind support and help of many individuals I would like to extend my sincere thanks to all of them First, I would like to thank my first supervisor, Prof Dr Nico B Rottke for providing me with the possibility to write my thesis at the Real Estate Management Institute of EBS University Without his trust in my capabilities, his academic support and his helpful advice throughout the process of writing and researching, this thesis would not have been possible I would also like to gratefully thank my second supervisor, Prof Jan Mutl, PhD, for being always approachable for methodological as well as content issues during this period Furthermore, I am also indebted to acknowledge the very valuable comments and suggestions for improvement from Prof Dr Joachim Zietz His revisions advanced this thesis a lot Second, I would like to express my gratitude to EBS University, especially the Real Estate Management Institute (REMI), and all research colleagues for their support and fruitful discussions in our doctoral seminars I’m also very grateful for the valuable comments I received during my presentation at the 22nd European Real Estate Society Conference in Istanbul Overall, the lectures and discussions which I attended and the people I met were a real enrichment for my academic life Finally, I would like to sincerely thank my parents and my wife for their unfailing support and continuous encouragement This accomplishment would not have been possible without them Dr Thomas Müller Contents List of Figures XIII List of Tables XV List of Abbreviations XVII Introduction 1.1 Motivation and Problem Definition 1.2 Thesis Structure The 2.1 2.2 2.3 2.4 2.5 2.6 Do 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Trade-off between Housing and Introduction The Trade-off Theory Analytical Framework 2.3.1 Theory 2.3.2 Econometric Specification Data Regression Results Conclusion Pensions 1 5 10 11 14 19 Europeans Release Their Housing Wealth in Old Age? Introduction Life-Cycle Theory and Housing Wealth Decumulation Empirical Model Data Regression Results International Differences Conclusion 21 21 22 24 25 28 31 33 37 37 38 39 41 41 45 45 48 50 Housing as a Pension: Policy Implications for Europe 4.1 Introduction 4.2 Key Challenges for the European Public Pension Systems 4.2.1 Demographic Aging 4.2.2 Financial and Economic Crisis 4.2.3 Effects on Pension Systems 4.3 The Role of Housing for Adequate Income in Old Age 4.3.1 Housing as an Income Source in Old Age 4.3.2 Perception of Housing as a Pension 4.4 Economic Theory and Empirical Evidence 58 Conclusion predicts an asset decumulation process after retirement By applying a panel logit model controlling for country and cohort effects, we found evidence for a decreased probability of homeownership with increasing years after retirement in line with the life-cycle hypothesis However, country patterns differ We identified three main reasons: Socio-political factors, economic factors, and personal attitudes Hence, the institutional setting of the welfare state, market access and regulation, and the perception of housing as a pension affect housing wealth release as well as its accumulation Economic theory and its empirical verification on the accumulation and decumulation of housing wealth in a certain welfare state setting are an important basis for asset-based pension policy with housing as a main pillar The conclusions we made in Chapter and Chapter are beneficial for pension legislators as European countries struggle to provide adequate pensions in the future The third part of the thesis discussed forthcoming key challenges for European pension systems against the backdrop of demographic aging and the last financial and economic crisis The EU pursues the goal to provide sustainable and adequate incomes for its retirees Pension reforms have already addressed the sustainability issue, aiming at the prevention of increases in public retirement spending By raising retirement ages or linking them to life expectancy and by limiting access to early retirement plans, pension expenditures are predicted to be almost stable on an EU average until 2060 (European Commission and Economic Policy Committee (Ageing Working Group), 2015) Nevertheless, with decreasing benefit ratios and lower replacement rates, most EU countries will experience negative effects on pension adequacy The level of pension income will decrease dramatically in some countries In this situation households may want to consider to supplement their public pension income with income derived from housing as their most valuable asset, either income in kind or income in cash Chapter debated housing as an income source in old age But households seem reluctant to draw from housing equity Housing is often seen as a financial reserve The perception of housing as an income source varies across generational and cultural backgrounds But as pension systems are under pressure, households might consider touching on their home equity reserve and relying less on state spending Concluding the thesis, it was reasonable to translate the obtained empirical findings into three suggestions to address future challenges from a policy viewpoint: (i) include housing wealth in the assessment of pension adequacy, (ii) encourage an asset-based welfare regime, and (iii) increase the awareness and allocation of ERS in Europe Adapting these suggestions would help policy legislators to address negative effects on pension adequacy by enabling EU citizens to establish and draw from their housing wealth reserve Conclusion 59 Further research on the accumulation and decumulation of housing wealth is particularly valuable because empirical evidence is still limited in a European context As SHARE expands its survey subjects and includes more countries, housing wealth developments can be tested on a more extensive basis This dataset provides an excellent basis for housing researchers, as it includes not only income and wealth measures but also data on social factors Therefore, further research could expand on the basis of a wider range of influencing factors Furthermore, as the institutional setting plays a major role, it is beneficial to incorporate accurate measures of housing and pension policies impacting the allocation of wealth Thereby, researchers would be able to provide solutions for policy makers in order to adapt to future challenges References Alessie, R., Angelini, V & van Santen, P (2013) Pension wealth and household savings in Europe: Evidence from SHARELIFE European Economic Review , 63 (C), 308-328 Angelini, V., Brugiavini, A & Weber, G (2009) Ageing and unused capacity in Europe: is there an early retirement trap? 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Another Look In D A Wise (Ed.), Perspectives on the economics of aging Chicago: University of Chicago Press A Additional Tables © Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2019 T Müller, Essays on Housing and Pensions, Essays in Real Estate Research 15, https://doi.org/10.1007/978-3-658-24955-7 55, 112 19, 355 7, 839 29, 511 1, 465, 998 573, 814 944, 472 Belgium Czech Republic Total 74 66 86 58 72 83 88 93 84 58 62 64 in % Owner Source: Own calculations based on SHARE Wave and SHARE job episodes panel Denmark 55, 523 22, 663 1, 091, 783 France 984, 284 12, 119 580, 251 Italy 1, 503, 170 9, 667 Switzerland 213, 630 619, 353 536, 711 Netherlands 31, 938 1, 101, 486 Sweden Spain 10, 416 24, 918 592, 024 732, 829 Austria in Euro Future Income in Euro Lifetime Income Germany Country Table A.1: Summary statistics of non-wealth parameters 72 61 74 63 70 70 82 86 93 71 76 64 in % Couple 91 98 89 81 93 90 92 89 94 94 90 88 in % Children 10 16 12 12 13 23 15 in % Inheritance 10.89 12.02 12.81 11.18 8.72 12.59 8.23 7.11 13.65 11.62 13.31 7.22 in years Education 66 A Additional Tables A Additional Tables 67 Table A.2: Regression coefficients: European sample (full estimation output) Normal Full Sample Robust Median Normal Retiree Sample Robust Median Pensions −0.06∗ (−2.05) −0.07∗∗ (−2.68) −0.10∗∗ (−3.30) −0.16∗∗∗ (−4.18) −0.18∗∗∗ (−5.93) −0.22∗∗∗ (−4.89) Owner 1.66∗∗∗ (21.85) 1.43∗∗∗ (22.87) 1.35∗∗∗ (18.43) 1.68∗∗∗ (19.29) 1.44∗∗∗ (20.51) 1.38∗∗∗ (16.79) Couple −0.38∗∗∗ (−4.92) −0.38∗∗∗ (−6.00) −0.35∗∗∗ (−4.73) −0.38∗∗∗ (−4.37) −0.39∗∗∗ (−5.54) −0.37∗∗∗ (−4.50) Children 0.09 (0.83) 0.02 (0.16) 0.07 (0.64) −0.06 (−0.46) −0.19 (−1.76) −0.07 (−0.57) Inheritance 0.12 (1.14) 0.15 (1.70) 0.08 (0.79) 0.17 (1.21) 0.15 (1.34) 0.08 (0.65) −0.00 (−0.37) 0.00 (0.34) −0.00 (−0.27) −0.01 (−0.66) −0.01 (−0.74) −0.01 (−0.91) Business 0.05 (1.38) 0.07 (1.12) 0.05 (1.26) 0.21 (1.18) 0.37 (1.50) 0.28 (1.36) Cars 1.56∗∗ (2.85) 1.45∗∗∗ (3.32) 1.20∗ (2.31) 1.48∗ (2.19) 1.69∗∗ (3.09) 1.57∗ (2.46) Other Real Estate 0.12∗∗∗ (3.83) 0.09∗∗ (3.27) 0.10∗∗ (3.55) 0.10∗ (2.56) 0.08∗ (2.66) 0.10∗∗ (3.35) Financial Assets 0.08 (1.76) 0.03 (0.88) 0.04 (0.79) 0.07 (1.15) −0.03 (−0.72) 0.00 (.) 0.00 (.) 0.00 (.) 0.00 (.) Germany 0.35 (0.59) 0.12 (0.24) 0.16 (0.25) 0.05 (0.14) −0.04 (−0.16) 0.06 (0.19) Sweden 0.36 (0.62) 0.18 (0.36) 0.15 (0.23) −0.72∗ (−2.13) −0.54∗ (−2.03) −0.44 (−1.34) Netherlands 1.40∗ (2.39) 1.08∗ (2.23) 0.96 (1.51) 2.08∗ (2.48) 2.24∗∗ (3.11) 1.89∗ (2.52) Spain 0.62 (0.73) 0.01 (0.01) 0.35 (0.43) 0.57 (1.42) 0.64 (1.91) 0.64 (1.65) Italy 0.56 (0.99) 0.53 (1.11) 0.55 (0.87) 0.60 (1.88) 0.66∗ (2.55) 0.59 (1.90) France 0.23 (0.42) 0.30 (0.65) 0.33 (0.54) −0.19 (−0.58) 0.40 (1.46) 0.29 (0.82) Denmark −0.12 (−0.21) −0.18 (−0.38) −0.14 (−0.22) −0.85∗∗ (−2.62) −0.67∗∗ (−2.61) −0.63∗ (−2.04) Switzerland −0.54 (−0.94) −1.04∗ (−2.12) −0.83 (−1.34) −1.69∗∗∗ (−4.91) −1.61∗∗∗ (−5.79) −1.43∗∗∗ (−4.43) 0.26 (0.46) 0.26 (0.57) 0.14 (0.22) −0.08 (−0.25) 0.23 (0.87) 0.21 (0.63) −0.11 (−0.18) −0.20 (−0.40) −0.21 (−0.33) 0.07 (0.23) 0.13 (0.50) 0.22 (0.69) 0.00 (.) Education Austria Belgium Czech Republic Age: 0-59 0.00 (.) 0.00 (.) 0.00 (.) −0.00 (−0.02) 0.00 (.) 0.00 (.) Age: 60-69 −0.30 (−0.53) −0.58 (−1.27) −0.63 (−1.03) 0.00 (.) 0.00 (.) Age: 70-79 −0.39 (−0.69) −0.52 (−1.12) −0.68 (−1.11) 0.07 (0.19) 0.04 (0.15) −0.05 (−0.13) Age: 80+ −0.09 (−0.13) −0.26 (−0.44) −0.31 (−0.42) 0.26 (0.45) 0.24 (0.53) 0.27 (0.51) Constant −1.05∗ (−1.97) 2959 −0.76 (−1.74) 2959 −0.62 (−1.03) 2959 −1.17∗∗∗ (−3.64) 2123 −0.94∗∗∗ (−3.62) 2123 −0.95∗∗ (−2.96) 2123 N t statistics in parentheses * p