For many Canadians, their home is the equity nest egg they nurture most carefully. But experts warn not to get in so deep that you can’t afford to grow your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA).
“A house is not a foundation for retirement income,” says Moshe Milevsky, associate professor of finance at York University’s Schulich School of Business in Toronto and executive director of the non-profit Individual Finance and Insurance Decisions Centre affiliated with Schulich. “A house is a place to live, which is just a small part of the retirement income challenge.”
Prof. Milevsky says people make some classic investment mistakes when they buy homes they can’t really afford and neglect other financial commitments. “I worry that Canadians are creating a very lopsided personal balance sheet,” he says. “They will have a large allocation to home equity but not much in terms of pensionized assets.” That means they have nothing to draw upon for an income stream later in life.
They are also undiversified. “It’s one house in one neighbourhood on one street in one city at one point in time,” says Mr. Milevsky.
It’s a risky approach if that house is your only asset, he says. “Take the cautionary tale of the U.S.” – the Case-Shiller Home Price Indices that remain nearly one-third below their 2006 levels.
Even a small drop can wipe out an over-leveraged homeowner, he says. “You can put down $50,000 as a five per cent down payment on a $1 million home. If prices fall just five per cent – not a lot – the house is worth $950,000 and you have no equity. Will the bank renew without you coming up with more equity? You’re under water.”
The solution? By all means, buy a home and carry a mortgage if it’s right for you, because a place to live is one part of planning for life, security and retirement, says Mr. Milevsky. But check the cost of renting versus buying on one of the many online calculators. If buying is still your best option, stay within your means.
“Don’t get into a bidding war. The last thing you want to hear is that you won the bidding war and there were 30 other bidders. That’s not good news.”