According to the 2016 Survey of Household Finances and Living Conditions, a mere 8.7% of retired households answered that their income was ‘sufficient’ enough to cover their living expenses while 39.0% and 21.5% believed it to be ‘insufficient’ or ‘severly lacking.’ In fact, as Korea’s population continues to rapidly age (over 14% of the total population is 65yrs and over), the proportion of households who are unable to afford a comfortable retirement is expected to rise in 2017. Seniors, in particular, are vulnerable in light of their low share of financial assets―mainly cash―compared to other age groups. Accordingly, estate liquidation may be a valid consideration for the government as the majority of assets held by the senior population is comprised of real estate.

Under the circumstances, this study explores the sustainability of the ongoing housing pension scheme in order to determine whether current asset-liquidation measures need to be enhanced in the long-term. For this, assumptions about the current housing pension scheme model were first reviewed and their long-term practicability was analyzed. Specifically, a quantitative analysis was conducted to examine whether the current payment level of the housing pension―which is determined by the present value of housing prices―is sustainable enough to properly respond to possible downward pressures in the housing market. Recommendations are also presented on the various aspects to consider when revising the model.

Among the determinants of housing prices, this study takes into account the demographic structure variable and economic growth rate variable to look into the housing price trends in the mid- to long-term. In doing so, the analysis uses the housing price determinants model constructed on co-integrated regression. The empirical analysis shows that real housing prices are affected positively by the economic growth rate and negatively by population aging. Indeed, if Korea’s economic growth is fixed at 3% until 2030 but the demographic structure changes as projected by Statistics Korea, real housing prices will rise by an annual average of 0.44% until the fourth quarter of 2020 and descend thereafter to 1.52% by 2030. This trend appears to be driven by increasing home sales and decreasing residential areas as those aged 65 and over rapidly become major players in the housing market.

Meanwhile, based on the estimated long-term trends in real housing prices, this study also examines nominal housing prices. Assuming that YoY inflation increases by 1%p and 2%p, respectively, nominal housing prices would decline by an annual average of 0.33% in 2017-2030 for the former and increase 0.66% for the latter. These long-term trends in housing prices differ somewhat from those in the basic assumptions which are reflected in the current housing pension scheme. That is, the scheme assumes an annual average increase of 2.1% in housing prices, which is higher than the growth rate of nominal housing prices estimated in the aforementioned empirical analysis. Ultimately, this implies that the government will likely have to bear the burden of the increased losses. A quantitative analysis reveals that if nominal housing prices grow consistently at 0.33%, the total loss to be covered by government expenditure will surge to 7.8 trillion won by 2044. A growth rate of 0.66% will entail a loss of 4.5 trillion won. These results show that if the growth in housing prices remains below Korea Housing Finance Corporation’s (HF) estimates for the growth in nominal housing prices (2.1%) and moves as assumed in the empirical analysis, the financial burden arising from the government guarantee on the housing pension will be quite substantial. Furthermore, an analysis on the demand for the housing pension scheme reveals that households are 8.86%p more likely to join the scheme when housing prices are expected to descend. This implies that when a decline in housing prices is expected, the housing pension estimation model should be adjusted in a more conservative manner considering the possibility of more households joining the scheme.

To elaborate on the scheme model, regionally differentiated housing prices should be reflected and HF’s assumptions for the growth in housing prices need to be adjusted. In addition, regional price trends must be considered separately as the registration rate is merely 0.88% and the majority of registered households reside in the capital region. At the same time, in regards to the low registration rate, a balance must be struck between promoting the scheme and improving its sustainability. The government is currently developing measures to invigorate the scheme by providing tax benefits. Indeed, tax reductions can serve as a useful means to cash-strapped seniors burdened by taxes. Also, in terms of institutional improvements, HF should be given more options other than the auction sale of mortgaged homes.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Current Status and Challenges of the Housing Pension
　Section 1 Basic Structure and Products of the Housing Pension
　Section 2 Housing Pension Enrollment Trends
　Section 3 Calculation of Pension Payments
　Section 4 Sensitivity of Financial Loss to Changes in Housing Price Growth Rate
　Section 5 Relationship Between Key Variables and Government’s Financial Burden

Chapter 3 Demand for the Housing Pension
　Section 1 Housing Pension Demand Analysis
　Section 2 KDI Housing Pension Demand Survey and Future Enrollment Projections

Chapter 4 Risk Factors in the Housing Pension Scheme
　Section 1 Understanding Key Risk Factors Related to Housing Prices
　Section 2 Long-Term Housing Price Trends and Associated Risks

Chapter 5 Summary and Policy Implications
　Section 1 Summary of Key Findings
　Section 2 Policy Recommendations

References
Appendix
ABSTRACT