1. Home Ownership and Equity in the Canadian LifePaths Model IMA 2011 martin.spielauer@statcan.gc.ca

2. 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

3. 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

4. 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

5. 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.

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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 2 nd mortgage / cashed out (and used to pay back mortgage depths if applicable)  Imputed rent: 3.5% of home equity

13. 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

14. 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

15. 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

16. 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