For much of the past year, we’ve experienced a period of declining housing prices. One reason has been the rapid rise in interest rates. Historically low rates made the cost of holding a mortgage affordable, but rising rates have increased the cost of borrowing substantially. Consider the impact on a $160,000 mortgage: A 5-year, fixed-rate mortgage with a 25-year amortization and 3 percent interest rate will have monthly payments of around $757. If interest rates double to 6 percent, monthly payments increase by $267. At first glance, this may not seem significant, but over the life of the mortgage, this equates to an additional $80,000 in interest costs! Higher borrowing costs have also made it more difficult to qualify for a mortgage and reduced the amount that some are eligible for.
At least for the near term, interest rates are likely to remain elevated as the central banks continue to fight inflation. New rules have also been put in place to try and slow the housing market, such as federal government measures like the “Residential Property Flipping Rule” and the “Prohibition on the Purchase of Residential Property by Non-Canadians Act.” However, there continues to be a significant supply shortfall, which is expected to support prices, especially as the population continues to grow. In fact, the latest figures (April) suggest signs of a housing market rebound that may largely be driven by a lack of supply. According to recent reports, the supply of new homes on the market is at a 20-year low.1
For many investors, the evolving housing market has changed the way we think about retirement planning. Here are two challenges:
Supporting (grand)kids to buy a home. With the cost of home ownership increasingly out of reach, many are assisting children. By some accounts, the average gift in the two most expensive housing markets — Toronto and Vancouver — has ranged from $130,000 to $180,000.2 Given this substantial amount, it is essential to carefully factor in how financial support may affect the gifters' own retirement plans — a recent survey suggests that 34 percent of parents are using their own retirement savings to help adult kids.3
Consider also that there are different ways to provide support, including purchasing the property in your name, gifting cash or lending funds to the child. Each comes with various tax and family law issues. For example, if the home is not designated as a principal residence, there may be a future capital gain payable upon its sale or disposition. Or, if the child is married/common-law, what happens if there is a marital breakdown? As such, seek advice from tax and family law professionals.
Relying on home equity in retirement. Sometimes a home’s value is viewed as a potential source of retirement income. We often suggest exercising caution with this perspective for various reasons: e.g., future real estate prices are not guaranteed; there are often unanticipated costs with a sale, such as renovations or maintenance — and, at the end of the day, you still need a place to live. Or, in due course, some find that selling a lifelong home ends up being too emotionally difficult. Of course, there are exceptions: some choose to become renters; others retire abroad to more affordable destinations. Even in these circumstances, planning for contingencies is important — you may be unable to find a suitable rental property or perhaps you will eventually decide to move back, such as to access Canada’s healthcare system.
These factors, along with others, may influence the wealth planning process for retirement and beyond. For a deeper discussion, please get in touch.
1. https://financialpost.com/real-estate/housing-market-sales-surge-double-digits; 2. https://www.theglobeandmail.com/investing/personal-finance/article-parents-gave-their-adult-kids-more-than-10-billion-to-buy-houses-in/; 3. “How Parents are Helping Their Adult Children,” R. Carrick, 04/11/23.