A clustering approach to assess house price risk in reverse mortgages: insights on the italian market

Although positive progress, aging of the population and increasing life expectancy have intensified poverty and inequality, even in advanced economies. The reverse mortgage is a supplementary pension product for elderly homeowners with valuable property but limited liquidity (’house rich and cash poor’). It allows them to borrow money using their home as a guarantee, maintaining the legal rights to the property. Debt repayment is deferred to heirs, who can settle the loan and reclaim the property. Heirs are ensured by the non-negative equity guarantee, which limits repayment to the actual value of the property. Unlike other countries, reverse mortgage is not widely developed in Italy, although they fit well into the context of aging and a high concentration of real estate ownership. The risks related to mortality, interest rates, and the volatility of house prices over time hinder its issuance. Above all, the house price risk undertakes a predominant role. Territorial analysis to differentiate areas with similar characteristics enables better management of this criticality. Exploiting geographically granular Italian real estate market values, a clustering procedure is adopted to account for territorial characteristics in the contractual specifications. This approach allows for performing risk segmentation and accurately representing the actual risk associated with each territorial zone.