This paper provides a new market consistent approach to the valuation of no negative equity guarantees and equity release mortgages. The paper provides a new approach to the estimation of volatility inputs. The proposed approach to volatility produces a volatility term structure that is dependent on the age and gender of the borrower. Illustrative valuations are provided based on the Black ’76 put pricing formula and mortality projections based on the M5 Cairns–Blake–Dowd mortality model. Results show interesting ramifications for industry practice and prudential regulation.

If the general level of house prices falls a long way, policymakers may introduce new policies which seek to support prices. This paper considers the effect of such interventions on the valuation of no-negative-equity guarantees (NNEG) in equity release mortgages. I model interventions by a reflecting barrier expressed as a fraction of the current level of house prices. Reflection at the barrier is instantaneous, so the no-arbitrage property is preserved, and hence risk-neutral valuation of NNEG is possible. The reflecting barrier can alternatively be justified as a representation of the different economic nature of the underlying housing (and particularly freehold land) assets in NNEG valuations, compared with the underlying equity assets in many other option valuations.

Housing is a platform of wealth accumulation in many home-owning societies. Ownership of assets often contributes to help people build social capital, influence their social participation and helps them access increasingly privatised goods and services. Such ‘asset-based welfare’ has been fashionable in Western academic circles, considering the ways in which housing could become a real or potential welfare resource. It may not, however, be such a novel idea from an East Asian perspective since the promotion of home ownership has always been embedded in the wider context of welfare provision in many parts of the region. Despite the argument that an increasing level of home ownership could potentially compensate for the erosion of family support, the sustainability of a home-ownership-based welfare approach has been questioned. At the forefront of ‘post-growth’ societies with societal ageing, recession, housing price volatility and neoliberal policy reforms, using Japan as a case study, this article examines the reasons and conditions behind the lack of success in commonly identified strategies of asset-based welfare in a regional context. The policy-driven market failures which supersede the cultural obstacles require re-examination.

Although equity release market sales have been flat since 2003, the market has seen significant developments in terms of product flexibility, with greater levels of guarantees and drawdown schemes, in particular, leading to the reduction in average case sizes. All things being equal, products should have become more expensive for consumers, but the competitive environment which has driven product innovation has also resulted in lower product margins. This is all good for the consumer, but it is increasingly difficult for providers to reach target returns on capital, and this is deterring some prospective new entrants. One of the purposes of this paper is to investigate the profitability of typical schemes in the market at present, and so to address the question of whether competition has forced the market to function at non-profitable levels. In doing this, the paper also provides a benchmark for existing providers and potential new entrants, against which they can check the reasonableness of their own assumptions. We will aim to provide a rational pricing methodology, which can be adopted by any organisation active in the market, and we hope that this can support the market as it expands over the coming years. In order to produce a set of cohesive results, we have modelled a range of potential outcomes using a pricing basis which we consider to be broadly ‘average’. While we would encourage providers to compare our results with their own pricing assumptions, and to ensure that they are satisfied as to the reasons for any differences, there is a health warning, as our results should only be used as a check in this regard. If our ‘averages’ are suitable for use by some providers, then this is just co-incidence. In practice providers should adapt the assumptions made to suit their own product features, target market, expense profile and appetite for risk.