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)
Re
pla
ce
me
nt
rate
(%
)
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