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 lifecourse 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:
• Finance / Equity:
• Savings:
Complementary data sources
Survey for Financial Security
used for modeling finance
(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
0.80
0.70
0.60
0.50
 Immigrants: later start, but
fast catch-up
 Families have higher
ownership rates at all
incomes
0.40
0.30
0.20
0.10
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
Birth cohorts
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
Source: Feng Hou: Homeownership over the Life Course of
Canadians: Evidence from Canadian Censuses of Population
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 2005
Source: 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
Ownership rates by age and income quantile;
couples
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64
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
Stacked average replacement rates
by component and retirement cohort, 1966-2060
120%
110%
Replacement rate (%)
100%
90%
80%
Housing equity
70%
RRSP
RPP
60%
GIS/SPA
50%
C/QPP
40%
OAS
30%
20%
10%
0%
1966- 1971- 1976- 1981- 1986- 1991- 1996- 2001- 2006- 2011- 2016- 2021- 2026- 2031- 2036- 2041- 2046- 2051- 20561970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
(Year an individual turns 66)
Source: Kevin D. Moore, William Robson, Alexandre Laurin
(2010) Canada’s Looming Retirement Challenge; C.D.
Howe Institute Commentary Pension Papers
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