It may be winter, but Vancouver’s love affair with real estate is in full bloom. After a brief pause to mark the recession, the hot topic over lattes is once again square footage and million-dollar views. Which is roughly the price tag Michael Lin kept coming across last week as he and a friend sat in a Granville Street café surfing MLS, the real estate listing website, on his laptop.
Lin, a computer programmer in his late 20s, has watched the ups and downs, and then ups again, of Vancouver’s housing market from his rented apartment. Now, with the economy in repair mode and mortgage rates still near record lows, he’s eager to take the plunge into the city’s condo market. He admits prices are higher than he’d like, but believes he can easily cover the mortgage payments even if interest rates start to rise. But when asked whether he will have enough left over at the end of the month to save for retirement, he chuckles. He wasn’t saving much before, either. “This way,” he says, “I’ll be forced to save.”
Lin has plenty of company. A growing number of Canadians have come to view their homes as the ticket to a secure retirement. There’s a lot to be said for that approach. Your house is the biggest investment you’ll ever make, and it compels you to watch your pennies. It’s also true that those Canadians who had all their money tied up in their homes instead of stock markets have come through the financial crisis with their household balance sheets largely intact.
But there are also huge risks that come with relying on your house to fund your retirement. Will house prices crash as baby boomers downsize? And is piling on debt to buy a home at record-high prices, such as we’re seeing today, really the best way for younger Canadians to save up for their golden years? So far we’ve avoided a U.S.-style housing crash, but there’s a growing view that the high-flying housing market is looking very bubbly. If you’re planning to bet your nest egg on your nest, you might want to think again. “For some people who are terrible savers it can be good,” says Peter Merrick, president of Merrickwealth.com in Toronto and author of The Trusted Advisor’s Survival Kit. “But when people actually look at the numbers they might find it doesn’t get them where they need to be. If they’re banking on their homes for retirement, they might be disappointed.”
Just how important are houses in the Canadian investing landscape? Benjamin Tal, an economist at CIBC World Markets, says 38.5 per cent of wealth in Canada is now tied to home ownership, up dramatically from 16.3 per cent two decades ago. Part of that has to do with rising home ownership rates. As of 2006, nearly 69 per cent of Canadian households owned their own homes, up from 63.6 per cent a decade earlier. But it’s also largely due to the fact house prices have been on a tear for most of this decade. Between 1999 and 2007 home values in Canada rose 66 per cent, leaving Canadians feeling a lot wealthier. After falling around eight per cent during the recession, prices are virtually back to where they were at the peak.
Yet in the rush to get into the housing market, Canadians have spurned more traditional savings vehicles like registered retirement savings plans. In fact until recently Canada could no longer lay claim to being a nation of savers, as it once proudly did. A study last year by the Vanier Institute of the Family found average savings had fallen to just $2,000 a year, or less than three per cent of disposable income, putting Canada well behind other developed countries like France (12 per cent) and Germany (11 per cent). The savings rate has inched back up over the last year as Canadians hunkered down. And Ottawa’s introduction of the tax-free savings account, which allows Canadians each year to shelter up to $5,000 from taxes, has also helped. But with go-go days returning to the housing market, few expect the savings rate to climb much higher.
Left to their houses, Canadians have several choices about how to get the most retirement bang out of their abodes, but each comes with potential risks. One increasingly popular option is a reverse mortgage, which gives homeowners access to cash while allowing them to stay in their homes. Reverse mortgage firms, which you can hear advertising heavily on radio and TV, offer loans to people aged 60 and over that are backed by the value of their houses. The loan doesn’t have to be repaid until you die, sell the house, or when it ceases to be your primary residence. Nor can the loan ever exceed the value of the home. But the problem is the debt carries higher interest rates than conventional mortgages, and since you don’t have to make any payments for such a long period, the loan can quickly explode in size. Over a 15-year period, all the equity in your home could easily vanish, especially if the value of the house declines. As Garth Turner, the former MP and financial author has said, a reverse mortgage “is an ideal strategy if you hate your children.”
A more obvious route is to put the home on the market and downsize. Canadians certainly are sitting on a veritable gold mine with their homes. According to the Canadian Association of Accredited Mortgage Professionals, homeowners have built up an astonishing $1.93 trillion in home equity, accounting for more than 72 per cent of the value of their homes. No wonder, then, that 28 per cent of Canadian homeowners over the age of 50 plan to sell their houses to fund their retirements, according to a survey by Royal LePage in 2006, when house prices were escalating rapidly.
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