Is housing an impedment to consumption smoothing?

Report prepared by CeRP for the Observatoire de l'Epargne Européenne, 2012

The wealth of European households, particularly within the Southern Mediterranean countries, is locked into illiquid assets, which are difficult to deplete when hard economic times hit. Financial literacy might reduce the exposure to excessively illiquid portfolios. However, the authors investigate the attitudes of a sample of Italian households with respect to products such as reverse mortgages helping making, at least partially, housing assets liquid. A simple descriptive statistic shows that nearly 60 per cent of respondents are not at all interested in the product. A simulation exercise under different scenarios shows that, particularly for countries such as Italy and Spain, the impact of annuities on poverty rates is impressive. Converting all housing value into an annuity, even at a high interest rate (10%) would generate ten percentage point reduction in the poverty rate. Resorting to reverse mortgage would reduce the degree of vulnerability of the elderly particularly in those countries which are «poor» in current income but «rich» in wealth and could consistently reduce the vulnerability among the elderly.

Is housing an impediment to consumption smoothing?