It can be a winning strategy for those who have built up a large amount of equity in their homes. For one thing, moving to a smaller home or condo can slash expenses like utilities, maintenance and taxes. Developers have clued in to the huge market potential by ramping up construction of bungalows, smaller townhouses and condos geared to retirees, not to mention luxury lifestyle communities all predicated on throngs of boomers selling their homes and scaling down.
Yet downsizing isn’t as straightforward as it seems. “You think that you’re going to have all this equity but it doesn’t always work out that way,” says Fred Bowie, CEO of the Canada Retirement Information Centre, an estate planning firm in Ottawa. Bowie can speak from experience. In the back of his mind, Bowie, 54, always planned to eventually sell his home and move with his wife into a smaller place, using the difference to help fund his retirement. But when the couple sold their home recently, they found they weren’t ready to move into a small apartment and instead opted to build a more costly retirement lifestyle bungalow. The lesson is that when it comes to your home, circumstances can change, making it unreliable for retirement planning. “Unless you need the money to pay for long-term care, I wouldn’t recommend people to rely on it for their retirements,” says Bowie. “You’ll still need to live somewhere.”
Another serious problem is that many Canadians still won’t even have finished paying off their houses by the time their retirement arrives. It used to be homeowners would scrimp and save in order to whittle down their mortgages, even throwing mortgage burning parties to mark their freedom from all that debt. Such parties are almost unheard of now. Lenders have been gradually offering longer-term mortgages, and borrowers have eagerly snapped them up. The traditional mortgage of 15 years might now stretch to more than three decades. What’s more, Canadians have increasingly borrowed against the equity in their homes to finance their lifestyles well before retirement. An estimated 37 per cent of Canadians over the age of 55 still have outstanding mortgages.
Assuming you still plan to use your house as a retirement vehicle, there’s something else to think about—you’re not alone. Millions of Canadians are all betting on the same strategy, and that could lead to serious problems down the road. One very real fear is that the barrage of boomers expected to retire between now and 2030 will drive down the housing market. There may simply not be enough younger buyers to absorb all those condos and townhouses boomers hope to unload. For one thing, the net growth in the number of new households forming in Canada each year—a key driver of the residential real estate market—is expected to slow, from 1.4 per cent in 2007 to 0.8 per cent in 2030. By that year, when all the boomers will have turned 65, it’s estimated there will be just two workers for each retiree. “If everybody comes on the market at the same time, prices are going to go lower,” says Merrick. “The people at the top who are planning to use their homes for retirement are going to face major downward pressure, because if there’s no one feeding the market at the bottom, there’s no one who can move up and buy your house. Demographics say it all.”
Not everyone agrees. Some point out boomers won’t all act in unison to sell their homes, and that the effect will be spread out over nearly two decades, minimizing the impact on any one particular year. “I don’t believe there is going to be a tsunami of supply that depresses home prices,” says Craig Alexander, deputy chief economist at TD Bank. Others point out that Canada is a popular destination for immigrants and that its aging population can be replaced by importing even more people from abroad. Theoretically, newcomers could provide a cushion to the housing market as boomers cash out.
The challenge there is that, so far, Canada’s track record of incorporating immigrants into the economy is terrible. A recent study by Statistics Canada found immigrants face a significant pay gap compared to Canadian-born workers. So while Tal, at CIBC, doesn’t believe there will be a housing crash, he does think demographics will slow the growth of house prices in the years to come. “If everybody follows the same strategy, and assumes they’ll sell the house and live off what they get, then you’ll have too much supply and you won’t be able to sell it for the amount of money that you think you can.” And that could come as a shock to those banking on ever-rising prices to finance their retirements.
Whether the housing market slows, or continues to grow at its historical average of around six per cent a year, financial advisers have more immediate concerns: the rush by younger Canadians like Lin to buy high-priced homes while mortgage rates are so low. Daniel Collison, a regional director with Investors Group in Markham, Ont., and an instructor at York University’s Schulich School of Business, says buyers could be setting themselves up for trouble in the near future. “When you see young professionals making $150,000 sitting there with $700,000 mortgages, they’re the ones who are most at risk,” he says. The problem isn’t just that prices are high, but that even a modest increase in interest rates could send their monthly mortgage payments skyrocketing.
For instance, someone who took out even a $300,000 mortgage when variable rates were as low as 2.5 per cent could see their monthly payments of $1,345 jump nearly $600 if rates rose to six per cent, and more than $900 if rates returned to eight per cent, where they were earlier this decade. “The shock that’s going to hit some of these people is just astounding,” says Collison.
“There’s a lot of artificial optimism about what they can afford to carry.”
In the end, perhaps it’s best to decide exactly where it is you plan to live—a house, or a home. They’re not the same thing. If you’re intent on treating your home as part of your retirement portfolio, you have to approach it the same rational way you would any other leveraged investment. But most people don’t think that way. Their home is where they live, where they raise families and create memories. So if your home happens to generate some extra cash after your retirement, all the better. But don’t overextend yourself. “Enjoy your home,” says Merrick. “It shouldn’t be a stresser.” And it shouldn’t be the cornerstone of your retirement.
Pages: 1 2
