The neighbourhood effect in diffusion of reverse mortgages

PURPOSE OF THE STUDY Housing is one of the most significant sources of wealth in Finland, and with an aging population, conventional life-cycle finance theory would argue that accessing that wealth will become increasingly important. Reverse mortgage is a financial innovation directed at creating liquidity in the illiquidity housing wealth. Despite a strong theoretical grounding and clear popularity, reverse mortgages, along with other consumer finance innovations, have received little attention in the finance literature. This thesis aims to contribute to the literature by reviewing prior literature on diffusion of innovations, and by utilizing a unique dataset, investigating the role of neighbours in this diffusion process. The objective is to understand whether the data shows signs of a social effect in the adaption decision i.e. whether the decisions by neighbours affect one's own decision to adapt. Along with this social effect, this thesis tests the fungibility of assets through considering what impact other wealth and income have on the adaption decision, along with the impact of several covariates. DATA This thesis utilizes a unique data set from a leading retail bank that includes exact information on adaption dates along with several key covariates including age, wealth, income and exact street addresses. The data period utilized in analysis covers full years 2006 to 2009. The information in street addresses is converted into coordinates which in turn are used to calculate neighbourhoods for individuals. These inner- and outer circle neighbourhoods are crucial in controlling for unobservable, spatially inhomogeneous effects. RESULTS The results show evidence that adoption by a near-neighbour increase the likelihood of one's own adoption. The impact however is relatively weak compared to the impact from age, and despite the utilized methodology, one cannot completely dismiss the existence of a local, uncontrolled variable. Age, along with travel insurance and early adoption of remote banking, play a significant role in determining the likelihood of taking a reverse mortgage. There is no evidence of the innovation spreading from urban to rural municipalities, which is in contraction to much of diffusion literature, and emphasizes the role of the marketer in the process. There is also weak evidence for the fungibility of assets, although as wealth and income seem to have limited impact on the adoption decision