Home Ownership and Equity in the Canadian LifePaths Model

IMA 2011

martin.spielauer@statcan.gc.ca

Organization:

What?• What is LifePaths?

Why?• Home ownership in context of model applications• Home ownership in context of development strategy

How?• Data• Assumptions• Parameterization• Implementation

Results & Outlook

What is LifePaths?

Large dynamic multi-purpose Canadian model, developed and maintained at Statistics Canada

Programmed in the generic microsimulation programming language Modgen

Continuous time model Case based model Open population Synthetic starting population Historic depth: first actors born 1871

Home ownership in the context of model applications

For study of retirement income adequacy For a majority home equity is single largest investment:

potential source of retirement income. The study of retirement income adequacy compares life-

course pre- and post-retirement consumption. Typically:• Consumption reduced due to housing investments /

mortgage payments in younger ages• Housing equity a potential additional source of income in

retirement

Home ownership in the context of the LifePaths development strategy

Currently, saving behaviors in LifePaths are limited to registered pension savings (Deferred Income Plans) • Registered Pension Plans linked to employment (RPPs)• Private Registered Retirement Saving Plans (RRSPs)

Housing wealth is a first step in more complete implementation of lifetime saving and consumption.

Mortgage loans part of an integrated accounting system on a personal and family level.

Data sources Single most important data source are census data 1971 - 06 The “long –form” (a 20% sample) contains information on

• Home ownership & dwelling characteristics, e.g. value• Individual and household characteristics, e.g. income

Missing in census: Complementary data sources• Finance / Equity: Survey for Financial Security

used for modeling finance• Savings: (Ontario) Tax data linking property

value, income, pension savings; used for study of correlation

Various other data sources, e.g. mortgage interest rates

Data: Home ownership rates

Very stable ownership rates by age over cohorts

Plateau reached at 65

Immigrants: later start, but fast catch-up

Families have higher ownership rates at all incomes

Source: Feng Hou: Homeownership over the Life Course of Canadians: Evidence from Canadian Censuses of Population

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 75+

Age

1916 to 1920 1921 to 1925 1926 to 1930 1931 to 1935 1936 to 1940

1941 to 1945 1946 to 1950 1951 to 1955 1956 to 1960 1961 to 1965

1966 to 1970 1971 to 1975 1976 to 1980

Birth cohorts

Data: Correlation with pension savings

Almost no correlation of ownership rates with annual registered retirement savings

Distribution of property values mostly depends on • Single/couple status• Income

For given income, home value is positively correlated with annual registered pension savings

Pension contributions 2005Source: Ontario tax data, Couples

Model assumptions People stay in ownership, except in case of union dissolution No correlation with pension savings Ownership rates depend on age, 5% income quantile, and

household type Property values depend on

• Calendar time• Household type• Income (5% quantile)• Position in home value distribution (5% quantile)

The position in home value distribution is randomly assigned and fix over life

Parameterization: ownership 5% Income Quantiles: by

calendar year and HH type. Produced by LP simulation

Ownership rates: by age, household type, income quantile. 2006 census

Home purchase probabilities: by HH type, income quantile and age. Calculated from a simulated source-destination matrix and ownership benchmarks

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64

Ownership rates by age and income quantile; couples

Parameterization: value and finance Home value quantile means for each income quantile: by

household type, calendar year (Census, scenarios) Mortgage interest rate (CANSIM, scenarios) Distribution of initial down-payments as proportion of home

value: by HH type and age at purchase. 5% steps (SFS) For further purchases (e.g. at union formation), the equity of the previous property is used as down payment.

First and second mortgage: • A first mortgage is assumed to have 25 years duration• The second mortgage is used to finance upgrades in

home value and has a 10 year duration

Parameterization: up/downsizing, other Share of home value changes assumed to be down/up-sizing:

• House price index controlled for quality improvement (proxy CPI)

• Yearly home value changes in the range of +/-5% from the general house price index are ignored

• 50% of remaining changes are financed via 2nd mortgage / cashed out (and used to pay back mortgage depths if applicable)

Imputed rent: 3.5% of home equity

Algorithm Step 1: Make mortgage payments if applicable Step 2: Decide if a home is sold (due to union events) Step 3: Decision if a home is purchased. Those who sold a

home at union formation immediately buy a new home Step 4: Assign or update a home value Step 5: Finance the home

• Down payment• Mortgage 1: 25 years• Mortgage 2: with each increase reset to 10 years

Validation Ownership rates and home

values by age, household type and income consistent with Census data by construction

Probably too high fluctuation of property values caused by income fluctuations

Equity in property by age: good fit with Survey of Financial Security (SFS) data

LifePaths 2005 SFS 2005

Equity by age, couples

Illustration of Results: replacement rates after retirement

Source: Kevin D. Moore, William Robson, Alexandre Laurin (2010) Canada’s Looming Retirement Challenge; C.D. Howe Institute Commentary Pension Papers

Stacked average replacement rates by component and retirement cohort, 1966-2060

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

1966-1970

1971-1975

1976-1980

1981-1985

1986-1990

1991-1995

1996-2000

2001-2005

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2035

2036-2040

2041-2045

2046-2050

2051-2055

2056-2060

(Year an individual turns 66)

Rep

lace

men

t rat

e (%

)

Housing equity

RRSP

RPP

GIS/SPA

C/QPP

OAS

Summary and Outlook Inclusion of housing closes a gap in the analysis of retirement

income adequacy, but is only a first step towards a complete model of savings

Planned improvements of housing module• Modeling on provincial level• Better integration into continuous time framework• More detailed response to life course events: migration,

immigration, union dissolution, death of partner• Modeling of sales / downsizing in retirement

Accounting framework including other assets• Consistency: budget constraints• Inheritance and intergenerational transfers