- Persistence of homeownership age profile across cohorts
- The homeownership plateau has been rising and shifting toward later ages
- Cohort differences vary by age group
- Income and family structure are associated with large homeownership differences across and within similar life stages
- Owned homes as a public good for household members
Homeownership affects investment, consumption, and savings decisions of households, and plays a major role in post-retirement well-being (Kendig 1984; Engelhardt 2008).
Homeownership is one of the most significant investments made by individual Canadians. As such, it leads to the building of wealth over an individual's life course (by that we mean the age profile and family status at the different stages of life). The resulting asset yields housing services, which are particularly critical to families with children, and can be liquidated later in life for retirement income or other needs (Crossley and Ostrovsky 2003; Thomas 2005).
In this paper, we ask two questions. First, to what extent do Canadians acquire and retain homeownership at different life-course stages, particularly after the age of 65? The purchase of a home is a major investment for a household. Of interest here is the extent to which Canadians of different ages, incomes, and family structures (including couples with and without children) make this investment.
Second, we ask whether the age profile of homeownership has changed over generations. Have succeeding generations of Canadian become any less likely to purchase a home during their life course, and do seniors today benefit to a lesser extent from the housing services that homeownership provides than seniors have benefited in the past? The ongoing debate about whether Canadians are or are not capable of providing for themselves in retirement focuses almost exclusively on the income of retirees and generally ignores the benefits of housing services that homeowners provide to themselves.
Using data from eight Canadian censuses of population, conducted between 1971 and 2006, we examine these questions by following homeownership rates of various birth cohorts born in the 1910s through the 1970s, beginning with the young adults of each cohort through to seniors.
Analytical studies in North America and Europe find that households adjust their housing tenure, as well as the quality and price of the services they consume, in response to their economic circumstances and their need for housing services (Alegre and Pou 2009; Engelhardt 2008; Myers 1999). As households experience transitions in family status—from single, to couples, to couples with children, and proceed with careers—housing choices often progress from rental accommodation to homeownership and then to upsizing in terms of quality and price (Kendig 1984). Although previous studies have examined the timing and correlates of transitions in people's "housing careers," reliable estimates of the homeownership age profile at the national level are rare in Canada 1 and in other developed countries. This is because separating the age profile from differences across birth cohorts requires observations over an individual's entire lifespan and comprehensive data sets that span a considerable period of time. The present study takes advantage of eight censuses spanning the period from 1971 to 2006, which contain consistent housing tenure information at the national level. We provide comprehensive, reliable, and up-to-date estimates that track birth cohorts over a long period of time.
An understanding of differences in homeownership among cohorts and of the possible causes of these differences helps us to follow the progression in housing tenure for cohorts from those that have just begun their careers to those in their retirement years, and to anticipate future developments.
2 Persistence of homeownership age profile across cohorts
In order to follow the housing life cycle, homeownership rates are calculated for household maintainers (i.e., the person(s) who pay(s) for shelter costs) across age groups for each Census of Population and plotted in Chart 1 (and Text table 1). 2 These profiles cover birth cohorts from 1916-20 through to 1976-80. Since the ownership rates pertain to the primary household maintainer, they will not correspond to the percentage of the general population living in a household that owns its home. The trend in the general population is examined in section 6.
There is a strong regularity in the age profile of homeownership over generations of Canadians. 3 The trajectories of the various birth cohorts are tightly clustered together, particularly those of young adults and the prime-working-age groups, thus showing a consistent homeownership age profile. There are some cohort differences with respect to ownership rates in pre-retirement and retirement age, although the shapes of the trajectories of all cohorts nevertheless follow a similar pattern at these two stages in their life courses.
In general, homeownership rises quickly with the age of household maintainers before their early 40s, and continues to climb at a slower pace until reaching a plateau of over 75% near age 65. The homeownership rate changes little from age 65 to 74 but starts declining after age 75.
The pattern of homeownership after age 65 is consistent with the hypothesis of a "ratchet effect" in housing: households tend to adjust their housing consumption upward but seldom reduce it (Kendig 1984). One implication of this pattern is that there is not likely to be a spike in the demand for rental housing and a massive increase in the number of houses for sale as the annual population reaching age 65 rises from 320,000 to 570,000 within the next 20 years and the size of this population then gradually levels off. On the basis of past experience, we know that most boomers are likely to retain their houses for more than 10 years after age 65.
Canada is not alone in the pattern of stable homeownership among seniors. U.S. studies suggest that seniors prefer to stay in their homes unless they are forced to do otherwise as a result of the death of the spouse or deterioration in health (Kendig 1984; Myers 1999). A study of 15 OECD countries reveals that homeownership starts falling only after age 70 in most countries and has declined by one percentage point per year by age 75 (Chiuri and Jappelli 2009). The same study indicates that Canada has a larger decline in ownership over the 65-to- 80 age group than do the U.S. and the U.K. This finding for Canada is based on the experience of those born in the 1900s and 1910s. 4 While consistent with the pattern reported here for the late-1910s cohort and early-1920s cohort, this finding is not consistent with subsequent cohorts, where there is less sign of a decline—perhaps resulting from the higher lifetime earnings of these groups.
3 The homeownership plateau has been rising and shifting toward later ages
Successive generations are achieving ever higher homeownership rates near the later part of their working lives. In our study, the level at which homeownership plateaus rose steadily across birth cohorts (Chart 2 and Text table 1). The peak level of ownership is 73% for the 1916-20 birth cohort, 76% for the 1926-30 cohort, and 77% for the 1936-40 cohort, and it rises further, to 78%, for the 1941-45 birth cohort.
Since those who were born in the 1950s have already surpassed earlier cohorts with respect to homeownership rates at age 45-49 and age 50-54, it is not unreasonable to expect that this cohort's peak ownership rate will also be higher than those of earlier cohorts. Recent international studies also find strong positive cohort effects with respect to homeownership among seniors in the U.S. and several European countries (Alegre and Pou 2009; Engelhardt 2008).
The homeownership plateau is also shifting towards later ages. Those born in the 1910s and 1920s reached their plateaus at age 55-to-59. Among those born in the 1930s and early 1940s, the plateau was not attained until age 60-to-64.
What lies ahead for the cohorts of people who are entering retirement age, i.e., those who were born during WWII (War babies) and early baby boomers? Forecasts are difficult when series are highly volatile. Nevertheless, homeownership changes over a life cycle are relatively constant across cohorts. As a result, previous studies have attempted to produce cohort projections based on the observed regularities in age profiles across birth cohorts (Myers 1999). Since adjacent cohorts tend to have age profiles that exhibit a similar shape even though their levels at a given age range may differ (Crossley and Ostrovsky 2003), projections are derived by starting with the homeownership level for a given cohort at the end point of observation, and by appending further increments of ownership changes that are derived from the slope of the most recently observed preceding cohort. For example, for the 1941-45 cohort, the projected increase from age 60-to-64 to age 65-to-69 is based on the slope for the 1936-40 cohort over the same age range, while the projected increase from age 65-to-69 to age 70-to-74 is based on the slope for the 1931-35 cohort over the same age range. This projection method suggests that the plateau is likely to continue rising and to approach 80% among those born in the early 1950s (see Chart 2).
4 Cohort differences vary by age group
A comparison of ownership differences across similar age groups at each Census of Population (Chart 3) provides a snapshot of how variations in historical macro-conditions affected the regularities in the life course that were described above. Prices for new houses, interest rates, the unemployment rate, and rental-housing vacancy rates all influence the affordability of owning a home as opposed to renting housing. The macro-environment has undergone dramatic changes over the period being examined here (see second Chart in Appendix). Similarly, the relative affluence of different cohorts has changed over time as boomers matured and as new cohorts entered the labour market.
The rise in the plateau of homeownership among these cohorts at pre-retirement age (55-to-64) emerges when homeownership rates are presented cross-sectionally by Census year (Chart 3 and Text table 2). The 55-to-64 age group is the only broad age group at which we observe a steady increase in ownership over the 35-year study period. This increase coincides with the generally greater expectancy of healthy and independent life after retirement. Between 1951 and 2006, the life expectancy of Canadians increased by some 12 years. By 2006, individuals aged 65 on average could expect to live for another 20 years (Millar 1995; Statistics Canada 2009). Longer life expectancy is a possible reason for individuals in pre-retirement age to increasingly acquire and retain homeownership. More importantly, the prospect of stable income after retirement has also improved with the gradual maturation of Canada's retirement income system. The birth cohort that turned age 65 in 1976 started to receive full CPP/QPP benefits, and later cohorts also increasingly benefited from the expansion of private occupational pensions that took place between the 1950s and the 1970s (Myles 2000).
Among seniors (65-to-74 and 75+), ownership declined early in the period that is the subject of this study (during the 1970s), particularly among seniors aged 75 and over. The majority of these seniors had reached age 65 before the early 1970s and as a consequence did not receive full CPP/QPP benefits. The 1970s were also the period of rapid increases in housing prices (see second Chart in Appendix). Since the 1980s, homeownership among seniors has risen gradually; this likely reflects the rise in family incomes, particularly at the bottom end of the income distribution. The low-income rate among seniors aged 65 and over declined from 30% of this population in 1980 to 14% in 2005 as a result of the increased direct effect of government transfer income (Picot, Lu, and Hou 2009).
In contrast to the declines in homeownership among seniors that took place in the 1970s, homeownership during this period increased among young adults aged 20 to 34 and the prime-working-age group (aged 35 to 54). This period also saw a tight rental market, a condition that strongly affects young adults, who are mostly renters (see second Chart in Appendix). The first baby boomers reached age 25 in 1971, and the share of young adults aged 25 to 34 in the total population rose from 13.6% to 17.6% over the next decade. Their rising share and growing numbers, enhanced by a decreasing tendency to live with their parents, drove down vacancy, and rents rose accordingly (Foot and Stoffman 1998). 5 The tight rental market and the rapidly rising housing price in the early 1970s made house purchase an attractive investment option for those who could afford it (Myers 1999).
From the early 1980s to the mid-1990s, ownership decreased for both young adults and the prime-working-age group. This was a period of high interest rates, recessions in the early 1980s and in the early 1990s, and a less tight rental market in the 1990s. Although the number of baby boomers entering the housing market (i.e., the population share of the 25-to-34 age group) continued to rise until 1989, the pressure of their large numbers and share in the population on the rental housing market was to a large extent offset by the rising tendency of young adults to live with their parents. While 8.3% of young adults (aged 25 to 34) had not left their parents' homes in 1981, this rate increased continuously thereafter and had reached 17.9% in 2006. From the early 1980s to the mid-1990s, the labour market outcomes of young men deteriorated across birth cohorts. Fewer of them worked full-time and full-year. Their weekly earnings also declined (Beaudry and Green 2000).
After the mid-1990s, ownership rates grew again among young adults and the prime-working-age group. This coincides with a period when interest rates, and therefore the cost of borrowing, became lower and when labour market conditions improved. In particular, the earnings of young workers increased in absolute terms and also relative to those of older workers (Morissette 2008). Changes in mortgage regulations also contributed to increases in homeownership rates in this period. In 1998, the Canada Mortgage and Housing Corporation (CMHC) made two of its temporary programs permanent: the Home Buyers' Plan; and the First Home Loan Insurance Program, which insures mortgages up to 95% of the value of a house (Hulchanski 2003). It was also easier than it had been in the past to obtain mortgage approval from lenders with only a small downpayment or no downpayment at all (Thomas 2005).
Over the 35-year period from 1971 to 2006, the overall ownership rate increased from 60% to 69% among households whose primary maintainers were aged 20 and over. About one half of this increase is due to changes in the age structure of Canadian society, particularly the large increase in the share of people aged 45 to 59 and those over 75. Homeownership also increased within each five-year age group over the entire period, despite large fluctuations in homeownership rates among young adults and seniors.
5 Income and family structure are associated with large homeownership differences across and within similar life stages
The profile of homeownership by age and cohort group presented in previous sections is an aggregate of individual homeownership rates of individuals who differ substantially by income and family type. Housing ownership varies considerably across income levels. Housing needs vary across family types. Changes over time in homeownership reflect both changes in the relationship between these characteristics and homeownership as well as the changing composition of the population.
The observed average age profile of homeownership partially reflects earnings growth over stages of the life course, as individuals' earnings increase with their work experience. The pace of earnings growth tends to be fastest in the first 10 to 15 years after entering the labour market, but slows down and stabilizes in the late part of the work career (Lemieux 2006). Homeownership follows a similar pattern.
The evolution of household structure also affects housing decisions. Families with children need more living space than do singles. Among those who can afford to purchase a home, life-course stages can influence the likelihood of buying and retaining a house, independently of income (Kendig 1984). Family formation may also influence income availability. When people enter into a conjugal union, their family earnings can increase substantially if both spouses work.
Our study also shows differences in homeownership rates by income within individual life-course stages. The largest differences between income quintiles in regard to homeownership occur among young adults. In 2006, in the 20-to-34 age group, over three quarters of households in the top income quintile were owners; less than one fifth of households in the bottom income quintile owned their homes. Among these young households, the ratio of ownership rates between top and bottom income quintiles was 4. The corresponding ratio was 2 in the 35-to-54 age group and 1.7 in the other three older age groups.
Among families with higher incomes, homeownership increased within all life-course stages between 1971 and 2006. The top income quintile in each age group experienced the fastest increase, followed by the fourth income quintile. To a lesser extent, homeownership also rose in the second income quintile, with the exception of people aged 75 and over. Over this period, real family income (i.e., family income adjusted for changes in the consumer price index) also increased the most in the top income quintile of each age group; the fourth quintile came next (Text table 3).
In contrast to the rising trend of homeownership in upper-income quintiles over this period, homeownership declined among households in the bottom 20 percent of the income distribution. As a result, the gap in ownership across the income distribution increased, especially among young adults and the prime-working-age group. In the 20-to-34 age group, the top income quintile was characterized by a homeownership incidence that was 23% higher in 1971, 119% higher in 1981, and 300% higher in 2006 than that of the bottom income quintile. The corresponding gap in the 35-to-54 age group grew from 18% in 1971, to 45% in 1981 and to 97% in 2006. Among older age groups, the expansion in the corresponding gap occurred primarily in the 1970s.
The impact of income on homeownership is large. Income often offsets the differences in homeownership resulting from the major life stages. Young people with high incomes have similar rates of ownership as those 10 to 20 years older with low incomes. As shown in Table 1, in 2006, homeownership in the top quintile of family income (adult-equivalent-adjusted) for the 20-to-34 age group is similar to homeownership in the middle income quintile of the prime-working-age group (35-to-54) and in the second quintile of the 55-to-64 and 65-to-74 age groups. 6
Within each broad age group, households in different income quintiles did not follow the same upward trajectory that we observed for the age group as a whole. For instance, in the 1970s, ownership rose considerably among young adults and the prime-working-age group. However, households in the bottom income quintile did not follow the same path—either by choice or by necessity. While the rental market was very tight during this period, homeownership became less affordable as a result of rising house prices and higher interest rates. In the 1980s and early 1990s, ownership declined for both age groups, but this decline was concentrated in the bottom and second quintiles. Only since the mid-1990s has ownership increased in all income quintiles.
Another factor associated with differences in homeownership is family structure. Within similar income levels, ownership rates vary by family type; this variation is likely the result of the specific housing needs associated with differences in conjugal relationships and childbearing activity.
Non-family individuals had the lowest ownership rate within each income quintile in every age group. However, the difference in the homeownership rates of non-family individuals and other family types has been reduced significantly over the last 30 years (Text table 4). This is because ownership rose at a much faster pace (although not necessarily by a larger percentage-point increase) among non-family individuals than among other family types in the second-highest income quintile within each broad age group (with the exception of the 75+ age group). For instance, in the 20-to-34 age group, ownership rates of non-family individuals in the top income quintile has grown from 12.5% to 60.4%, an increase of 48 percentage points in the last 35 years, compared with an increase of 29 percentage points—from 65.4% to 93.6%—among couples with children.
The overall homeownership rate for Canada over this period increased also as a result of a shift in the composition of the overall population to one with a greater proportion of individuals whose homeownership rates were increasing. The share of non-family individuals grew substantially in two working-age groups (age 35-to-54 and age 55-to-64). As non-attachment to family becomes more common, it may also be considered a less transient status, at least with respect to the purchase of a home.
In short, non-family individuals with higher incomes were much more likely to purchase homes in 2006 than the same age group had been three decades earlier. Among young adults and the prime-working-age group, non-family individuals in the top income quintile had a much higher ownership rate than couples with children in the bottom income quintile in 2006. This is a complete reversal of the pattern found in 1971, when non-family individuals had low ownership rates regardless of their income levels (Text table 4).
Despite the changes that non-family groups have experienced over time, a higher homeownership rate is associated with conjugal relationships and the presence of children than with non-family individuals. The relative importance of the first two factors, conjugal relationships and the presence of children, varies by age and income. Among young adults aged 20-to-34, the presence of children is associated with a higher level of homeownership than is a conjugal relation alone. While couples with children had the highest ownership rates in every income quintile, lone parents also had much higher ownership rates than did couples without children in the second, third, and fourth income quintiles. This pattern was consistent from 1971 to 2006. Female lone parents in the bottom income quintile had lower ownership than did couples without children. Since young female lone parents were concentrated mostly in the bottom income quintile, their overall ownership rate was low.
In the prime-working-age and pre-retirement-age groups, conjugal relation is more important than the presence of children in influencing ownership. Female and male lone parents are spread across the income distribution and tend to have much lower ownership rates than couples with or without children, especially in the bottom two income quintiles. In the prime-working-age group, the presence of children remains an important differentiating factor of ownership between couples with children and couples without children, with the latter group having a lower rate. In the pre-retirement age group, the presence of grownup children makes no difference in ownership among couple families.
Similarly, ownership rates vary little by the presence of adult children in the 65-to-74 age group, but in the 75+ age group it is associated with a difference of a few percentage points. In both age groups, only a small share of families has children present, and the dominant family structures are couples without children and non-family individuals.
Interestingly, the share of couples with children increased the most in the two upper-income quintiles among senior-aged households (aged 65 or over) and by 2006 was much higher in the upper-income quintiles than in the lower-income quintiles. The same pattern holds in the pre-retirement age group (55-to-64). These results suggest that the rising trend of adult children residing with their parents occurred mostly in high-income families. Overall, in retirement ages, ownership rates in the upper-income quintiles are high regardless of family type.
6 Owned homes as a public good for household members
Owned homes serve a dual function: each owned home constitutes an asset and provides consumption goods for the household. While the home may not be owned by all members of the household, all participate in consuming the services (i.e., the shelter and the associated local amenities) provided by this asset. Put differently, this means that an owned home is a 'public' good for both owners and non-owners in the household. Non-owners include: children and youth living with their parents; relatives and friends living with the family; and seniors living with their adult children.
In the previous sections, we examined ownership at the level of household primary maintainers. Here, we broaden our sights by examining the share of individuals who live in owned homes. The percentage of women and men who are members of households living in owner-occupied dwellings is presented in Charts 4 and 5 (also Text table 5).
A comparison of Chart 1, which is based on households, and Charts 4 and 5, which are based on individuals, reveals that young adults in their early 20s, particularly men, are mostly likely to live in homes not owned by them. For instance, among those born in 1976-1980, while only 15% of household maintainers aged 20 to 24 own homes, 62% of men and 56% of women in this age group live in owner-occupied houses. Men tend to form conjugal relations later than women and as a consequence may reside in their parents' homes a year or two longer.
There is a trend of a rising share of people in their early 20s living in owner-occupied homes, even though there is no long-term, consistent rise in ownership among young households. This reflects the fact that fewer people in their early 20s leave their parents' homes than used to be the case. Over the last 35 years, more people in this age group lived with their parents. The share of people in their early 20s living in owner-occupied homes rose from 31% to 56% for women and from 52% to 66% for men.
The gap between the share of those living in owned dwellings and ownership rates at the household level declines rapidly with age. For women, the gap by and large disappears by their late 50s and remains very small in later ages. In comparison, for men the gap drops until their later 50s, but rises again in their later years.
There is a strong regularity in the age profile of homeownership across generations of Canadians that is evident in data from Canadian censuses of population conducted between 1971 and 2006. Homeownership rises quickly with the age of household maintainers in the period before the age of 40, and continues to climb thereafter at a slower pace until reaching the plateau near retirement age. The homeownership rate changes little in the early years of retirement but starts declining in a person's late 70s. Thus the majority of seniors continue to receive the services associated with homeownership for more than 10 years after the age of 65.
We observe that the level at which homeownership plateaus has risen steadily across birth cohorts since the 1970s. The peak level of ownership rose from 73% for those born in the early 1910s to 78% for those born during WWII. Today, over three quarters of Canadian households own their homes by the age of 65. Given that those born in the 1950s have surpassed earlier cohorts in ownership rates by age 50, it will be interesting to see whether the plateau for this age group will be higher than that for earlier cohorts at age 65.
Family income has been closely related to both the level of homeownership and the increase in homeownership since 1971. There was a substantial difference in homeownership across income quintiles throughout the period; this difference increased over this time, as a result of the fact that the homeownership rate declined for the lowest-income group but rose for higher-income groups.
Families with children were the most likely group to own a home in 1971, and this trend continued into 2006, but the difference with other groups in this respect has declined over time. The likelihood of homeownership increased at a greater rate for couples without children and for non-family individuals over this period. The proportion of these two groups in the overall population also increased over this period. While these two groups still were less likely to own a home than were couples with children, the increase in the ownership rates of these two groups offset the effect of the shifting composition of the overall population to the two groups with lower ownership rates.
Owned homes provide shelter and the associated local amenities for both owners and non-owners in the same household. Young adults in their 20s and 30s, particular young men, tend to benefit the most from the housing services that derive from homes owned by others—in most cases, their parents. The tendency of adult children to remain living with their parents has increased over the last three decades.
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