Economic Insights
Income from Owner-occupied Housing, 1969 to 2011: New Evidence from the Survey of Household Spending and the Survey of Financial Security

by W. Mark Brown and Afshan Dar-Brodeur
Economic Analysis Division

Release date: December 10, 2015

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This articleNote 1 in the Economic Insights series uses data from the latest cycles of the Survey of Household Spending and the Survey of Financial Security to examine trends in the implicit income derived from owner-occupied housing. Covering the 1969-to-2011 period, the article updates previous estimates of the returns to housing in order to assess the implications of the shifting economic environment of the late 2000s.

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Although trends and determinants of home ownership have frequently been analyzed, the focus has shifted recently to the implicit income generated by owner-occupied housing, because it provides a potentially important source of income in retirement.  In an analysis of the implicit income generated by owner-occupied housing during the 1969-to-2006 period, Brown and Lafrance (2010) demonstrated an overall rise in the percentage of household income derived from home ownership. However, more recent changes in the economic environment could have affected the returns to housing.

The continued increase in Canadian home prices after the 2008-2009 global financial crisis may have increased the returns to owner-occupied housing, but the size of these gains also depends on the net equity in the home. New homeowners who found it difficult to assemble a down payment may have contributed to lower home equity levels in the younger age groups in which they tend to appear. In contrast, older homeowners, who entered the housing market before the recent boom, may have seen greater equity gains. The net gain in the returns to housing, therefore, depends on a number of factors that influence home equity as well as on the implicit return on the housing asset.Note 2 In this context, the current article uses data from the most recent Survey of Household Spending (SHS), its predecessor the Survey of Family Expenditures (FAMEX), and the Survey of Financial Security (SFS) to estimate the income generated by investment in owner-occupied housing over the 1969-to-2011 period.Note 3

Overall, the article finds that between 2006 and 2011 the contribution of income from housing by and large at least kept pace with other sources of income for both younger and retirement-age homeowners. Owner-occupied housing continues to be an important source of income for retirement-age households that help to close the income gap between these households and their working-age counterparts.

Home ownership and home equity

For the population as a whole, trends in the returns from housing will partially be determined by trends in home ownership. Evidence from FAMEX and the SHS suggests that home ownership rates continued to rise in the 2000s across all age groups (Chart 1). This was most apparent for people just entering the workforce and those of retirement age. From 2006 to 2011, home ownership rates increased from 27% to 35% among 20- to 29-year-old households and from 67% to 71% among households aged 70 or older.Note 4 Increases were more modest for other age groups, with no change in home ownership rates among 50- to 59-year-olds (77%). Overall, home ownership rates in 2011 were among the highest they have been over the 42-year study period, particularly for people at the start and end of their working lives.

Chart 1 Entry rate and job creation rate, seasonally adjusted, 2001 Q1 to 2014 Q3

Description for Chart 1

Chart 1, Home ownership rate, by age group, 1969 to 2011
Chart 1 contains six smaller charts which are derived from the data table below.
Chart 1-1, 20 to 29 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “20 to 29 years”.
Chart 1-2, 30 to 39 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “30 to 39 years”.
Chart 1-3, 40 to 49 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “40 to 49 years”.
Chart 1-4, 50 to 59 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “50 to 59 years”.
Chart 1-5, 60 to 69 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “60 to 69 years”.
Chart 1-6, 70 years or older
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “70 years or older”.

Chart 1
Home ownership rate, by age group, 1969 to 2011
Table summary
This table displays the results of Home ownership rate 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006 and 2011 (appearing as column headers).
  1969 1974 1978 1982 1986 1990 1996 2001 2006 2011
20 to 29 years 21 14 30 27 24 21 31 24 27 35
30 to 39 years 58 51 68 64 59 54 57 57 57 58
40 to 49 years 72 63 76 77 73 69 68 72 67 71
50 to 59 years 73 64 76 76 75 74 76 75 76 77
60 to 69 years 68 59 71 71 70 73 73 76 73 76
70 years or older 61 49 66 59 54 53 63 64 67 71

Canadians continue to purchase homes, with greater numbers potentially benefitting from the additional income generated by housing. At issue is whether the implicit income attributable to owner-occupied housing has changed in the wake of the 2008-2009 recession.

Determining the implicit income from owner-occupied housing requires estimating the value of housing services. Housing is an asset (capital) that provides a flow of housing services, with the accumulation of equity paying for these services. Thus, purchasing a home is an investment that should pay a return. The value of housing services paid for by equity in the home represents this return and the implicit income generated by the home. Trends in the estimated return to equity, therefore, will be partially determined by the accumulated equity in the home.

For the purpose of this study, home equity is the value of the home, net of the remaining balance on the mortgage.Note 5 It is derived from information available from FAMEX from 1969 through 1996. Because this information is not available from the 2001-to-2011 SHS, the SHS is supplemented by home equity values from the 1999, 2005 and 2012 SFS. As well, the 2001 SHS did not report the value of the home—this information is derived from the 2001 Census.Note 6

As expected, home equity shares—that is, home equity as a percentage of the total value of the home—rose with the age of the homeowner, regardless of the year in question (Chart 2). But unlike trends in home ownership, home equity shares declined among all age groups in recent years, particularly younger Canadians. Thus, while both home ownership rates and home prices have risen, Canadians have contributed relatively less money toward home equity, a trend that has persisted since the mid-1980s. For homeowners aged 20 to 29, home equity was lowest in 2001 (33%); this percentage rose to 40% in 2006, but declined to 37% in 2011, perhaps reflecting the drop in interest rates and accompanying rise in home prices in that period. For homeowners aged 30 to 39, home equity shares declined from 66% in 1986 to 51% in 1996, and to 43% in 2011. These trends held for older age groups, but were less pronounced for homeowners older than age 50.

Chart 2 Entry rate and job creation rate, seasonally adjusted, 2001 Q1 to 2014 Q3

Description for Chart 2

Chart 2, Home equity shares, by age group of homeowner, 1969 to 2011
Chart 2 contains six smaller charts which are derived from the data table below.
Chart 2-1, 20 to 29 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “20 to 29 years”.
Chart 2-2, 30 to 39 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “30 to 39 years”.
Chart 2-3, 40 to 49 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “40 to 49 years”.
Chart 2-4, 50 to 59 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “50 to 59 years”.
Chart 2-5, 60 to 69 years
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “60 to 69 years”.
Chart 2-6, 70 years or older
This is a bar chart.
The unit of measure for this chart is “rate (percent)”.
There is 1 series in this graph.
The units of the horizontal axis are 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006, 2011.
The title of series 1 is “70 years or older”.

Chart 2
Home equity shares, by age group of homeowner, 1969 to 2011
Table summary
This table displays the results of Home equity shares 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006 and 2011 (appearing as column headers).
  1969 1974 1978 1982 1986 1990 1996 2001 2006 2011
20 to 29 years 63 58 46 54 57 46 41 33 40 37
30 to 39 years 67 68 59 63 66 62 51 47 45 42
40 to 49 years 77 79 78 79 78 76 71 64 66 63
50 to 59 years 86 88 90 89 90 89 83 80 79 78
60 to 69 years 95 95 96 96 97 95 93 92 90 89
70 years or older 98 99 99 99 99 99 98 97 97 96

These findings point to higher home ownership, but lower home equity shares. Low interest rates in recent years may have induced Canadians to purchase homes, thereby increasing the home ownership rate. However, with the continued increase in home prices, it is possible that they have been making relatively smaller down payments than in earlier periods, which resulted in lower equity shares. Returns to housing depend on the twin effects of lower home equity shares and higher house prices. This impact is assessed in the next section.

Value of housing services and implicit income

If housing is treated as an asset, the value of housing services can be estimated either by measuring the capital services provided by the investment in the home or by the rent that could be obtained for the home if it was on the rental market, often referred to as imputed rent. Capital services can be estimated via user cost, which is the price that an owner of an asset would demand when renting out the asset. Because the user cost of a dwelling and its imputed rent tend to equate, the value of housing services can be derived by incorporating elements of these two measures.Note 7  The resulting nominal dollar estimates of the value of housing services tended to increase over the period, which is expected to occur with generalized inflation, with a slight decline in the average between 1990 and 1996, and a rise from 2001 (Table 1).Note 8 These trends coincided with the upturn in housing prices after 2000, particularly since 2006, with the average value of housing services increasing by 31% between 2006 and 2011 (from $10,693 to $14,008), outpacing the generalized rate of inflation of 10%.Note 9

Table 1
Average annual value of housing services by house value quintiles (estimates based on user cost and imputed rents), 1969 to 2011
Table summary
This table displays the results of Average annual value of housing services by house value quintiles (estimates based on user cost and imputed rents) 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006 and 2011, calculated using dollars units of measure (appearing as column headers).
  1969 1974 1978 1982 1986 1990 1996 2001 2006 2011
dollars
Quintile 1 307 1,197 936 1,397 1,712 3,855 3,056 4,643 3,897 5,800
Quintile 2 599 1,727 1,673 2,111 2,836 5,462 5,009 6,809 6,492 9,150
Quintile 3 873 2,011 2,115 2,713 3,668 6,919 6,391 8,264 8,703 11,676
Quintile 4 1,074 2,537 2,732 3,461 4,690 8,954 8,318 10,299 11,642 15,128
Quintile 5 1,539 3,783 4,171 5,337 8,200 15,331 14,305 15,839 22,163 26,317
Mean 896 2,327 2,421 3,082 4,296 8,319 7,514 9,183 10,693 14,008

The value of housing services is multiplied by the derived equity shares (in the previous section) to capture the implicit income generated by home ownership—in other words, the total return to equity invested in the house. The income that housing provides as a percentage of total personal income inclusive of these returns (but net of taxes and deductions) indicates its relative importance over time and across age groups (Table 2, Panel A) (net personal income and the return to equity are adjusted for household size across age groups, and percentages are reported for homeowners only).Note 10  Regardless of the year, returns to housing equity increased in relative importance with the age of the homeowner, as reflected by their rising share of total income. For homeowners of all ages, the share of income derived from home equity increased between 1969 and 2011. For those aged 70 or older, the contribution of implicit income from equity invested in housing fluctuated between 1969 and 1986, from a low of 10.6% in 1969 to a high of 18.3% in 1974; the average for this sub-period was around 13%. The percentages were consistently higher in the 1990-to-2011 period, averaging about 16%. Moreover, despite declining home equity shares between 2006 and 2011, the share of implicit income derived from equity invested in housing rose for this age group from 15% to almost 17%.

Homeowners aged 20 to 29 also derived a higher share of income from housing, particularly in recent years. Again, while home equity shares for this age group declined between 2006 and 2011, the share of implicit income from equity in home ownership increased from 5% to 6%.  Increases in the income share of returns to equity for homeowners in other age groups were similar, although gains were more moderate for 30- to 39-year-olds.

In recent years, concerns have been expressed about Canadians’ preparation for retirement. One way to assess the financial position of retired Canadians is to measure the income gap between those of retirement age and those of working age (Table 2, Panel B). Accounting for the implicit income from owner-occupied housing in these comparisons demonstrates the importance of housing as a potential source of retirement income (Table 2, Panel C). Based on the income of retirement-age (70 or older) homeowners relative to that of mid-career (40 to 49) and late-career (50 to 59) homeowners, the average income gap has narrowed in recent years, particularly when the implicit income generated by housing is taken into account. In 2011, the average net income of homeowners aged 70 or older was 78% of those aged 40 to 49, a 22-percentage-point income gap. However, when the returns to home equity are taken into account, the income of homeowners aged 70 or older amounts to 84% of that of homeowners aged 40 to 49, a 16-percentage-point income gap. The pattern relative to homeowners aged 50 to 59 is similar.  

Table 2
Average net annual household income and returns to housing equity, adjusted for household size, by age group of homeowner, 1969 to 2011
Table summary
This table displays the results of Average net annual household income and returns to housing equity 1969, 1974, 1978, 1982, 1986, 1990, 1996, 2001, 2006 and 2011, calculated using percent and ratio units of measure (appearing as column headers).
  1969 1974 1978 1982 1986 1990 1996 2001 2006 2011
percent
Panel A – Share of income from housing equity  
Age group of homeowner  
20 to 29 4.2 6.1 3.9 3.4 4.3 4.8 4.7 5.4 4.9 6.0
30 to 39 4.5 7.5 5.5 4.4 5.4 7.7 5.7 6.3 5.8 6.0
40 to 49 5.2 8.6 7.0 5.3 6.3 9.5 7.6 8.5 8.1 9.4
50 to 59 5.9 9.6 8.4 6.3 7.4 11.0 8.8 11.0 10.0 11.2
60 to 69 8.2 12.5 11.3 8.4 9.7 15.3 12.3 15.2 13.7 14.1
70 or older 10.6 18.3 15.0 10.9 12.3 18.3 14.9 17.3 15.1 16.6
  ratio
Panel B – Relative net income  
Age groups of homeowners  
70 or older relative to 40 to 49 0.64 0.68 0.60 0.65 0.64 0.73 0.69 0.68 0.71 0.78
70 or older relative to 50 to 59 0.62 0.60 0.57 0.61 0.62 0.70 0.66 0.65 0.66 0.74
Panel C – Relative net income plus returns to home equity  
Age groups of homeowners  
70 or older relative to 40 to 49 0.68 0.76 0.66 0.69 0.69 0.81 0.75 0.75 0.77 0.84
70 or older relative to 50 to 59 0.65 0.67 0.62 0.65 0.65 0.76 0.71 0.70 0.70 0.78

Accounting for home equity lines of credit

Over the past decade, home equity lines of credit (HELOCs) became an increasingly popular means to buy homes or to unlock the equity in homes to make other purchases. Their increased use, however, may result in the overestimation of home equity and, in turn, the returns to owner occupied housing. To account for this, returns to owner occupied housing were re-estimated while taking into account the effect of HELOCsNote 11 on home equity.

In 2001, the effect of HELOCs was quite small, reducing home equity by about 1 percentage point or less (see Table 3). Over the ensuing decade, the increasing popularity of HELOCs reduced equity by more, particularly for those households aged 40 to 49 and 50 to 59 whose equity shares fell by about 4 percentage points. Nevertheless, their effect on equity levels was modest.

Table 3
Home equity shares and share of income from home equity with and without HELOCs taken into account
Table summary
This table displays the results of Home equity shares and share of income from home equity with and without HELOCs taken into account Without HELOCs, With HELOCs, 2001, 2006 and 2011, calculated using percent units of measure (appearing as column headers).
  Without HELOCs With HELOCs
2001 2006 2011 2001 2006 2011
percent
Panel A - Home equity shares  
Age group of homeowner  
20 to 29 33 40 37 33 39 36
30 to 39 47 45 42 46 43 40
40 to 49 64 66 63 63 62 59
50 to 59 80 79 78 78 77 74
60 to 69 92 90 89 91 88 86
70 or older 97 97 96 97 96 94
Panel B - Share of income from home equity  
Age group of homeowner  
20 to 29 5.4 4.9 6.0 5.4 4.7 5.9
30 to 39 6.3 5.8 6.0 6.2 5.6 5.7
40 to 49 8.5 8.1 9.4 8.3 7.7 8.8
50 to 59 11.0 10.0 11.2 10.9 9.7 10.6
60 to 69 15.2 13.7 14.1 15.1 13.3 13.7
70 plus 17.3 15.1 16.6 17.2 15.0 16.4
Panel C - Relative net income plus returns to home equity  
Age group of homeowner  
70 or older ratio to 40 to 49 0.75 0.77 0.84 0.75 0.78 0.85
70 or older ratio to 50 to 59 0.70 0.70 0.78 0.70 0.70 0.79

As a result, the share of income derived from home equity falls, but not to such an extent the main findings are changed qualitatively as the basic levels and trends in the data are maintained. Furthermore, the ratio of income of older retirement aged households to that of working age households aged 40 to 49 and 50 to 59 is left essentially unchanged.

Reference

Brown, W.H., and A. Lafrance. 2010. Incomes from Owner-occupied Housing for Working-age and Retirement-age Canadians, 1969 to 2006. Economic Analysis Research Paper series, no. 66. Statistics Canada catalogue no. 11F0027M. Ottawa: Statistics Canada.

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