Soaring house prices are influencing people to make bad decisions about retirement planning.
The financial advice firm Investors Group released a survey yesterday in which 23 per cent of participants said the cost of owning a home will cause them to contribute less to a registered retirement savings plan.
"With housing prices having gone up, people are spending more on their homes," said Debbie Ammeter, vice-president of advanced financial planning support for Investors Group in Winnipeg. "There may also be concern about interest rates having gone up since people initially took out their mortgages."
The average house price nationally in September was $277,470, which is about 50 per cent higher than it was five years ago. In cities like Toronto, Calgary and Vancouver, the average price was between roughly $350,000 and $527,000. It's rapidly becoming clear that certain financial sacrifices are inevitable when you buy a home at those prices, and one of them may be putting enough away in a registered retirement savings plan.
"Obviously, the household finance pie can only be divided so many ways," Ms. Ammeter said. "What people look at when making their investment decisions is probably heavily influenced by the amount that they're paying on a mortgage."
A hot housing market undermines sound retirement planning in a couple of ways. Not only do people have less cash left over for RRSPs after paying the mortgage, but they also develop some skewed ideas about how useful their homes are going to be as a source of income in retirement.
In the Investors Group survey, about half of non-retired participants believed their real estate assets will grow more in value than their investments over the next 10 years. This is a decrease from 65 per cent last year, but it remains a worrying sign of vacant thinking by Canadians about the value of a home.
Investors Group's own figures show that from 1995 to 2005, the average home price rose by an average of a bit more than 5 per cent a year, while the Toronto Stock Exchange returned an average 11 per cent. Long-term stock market gains are more likely to be in the 7- to 8-per-cent range, but that still gives the stock market an advantage over a home.
Everyone loves the housing market during a boom -- it's no big deal as long as you regard your home primarily as a place to live. The harm is in getting grandiose ideas about how your home will help finance your retirement. In the Investors Group survey, 51 per cent of participants said they are relying on their home as one of their sources of retirement income. Among the baby boomers in the survey, 55 per cent said their home will be a source of funds in retirement (a total of 2,170 people participated in the survey, which was conducted last month).
The problem with using your home as a source of retirement income is that it's a very inconvenient source of funds -- you can't take cash out unless you either sell or incur some debt through a home-equity line of credit or a reverse mortgage. "You have to be realistic," Ms. Ammeter said. "The question to ask is, how are you going to realize on your investment in your home?"
One idea you hear a lot is that retirees will "downsize" -- sell their home in retirement, move to a smaller residence and pocket the money that is left over. There's no guarantee that downsizing will net you much cash, however.
For example, you may end up wanting to move into a small house or condo in a pricier neighbourhood than you live in now, or you may find that the type of dwelling you see yourself living in after retirement commands a price premium. For example, you may not save much in Toronto by moving to a bungalow from a two-storey home.
Another thought: You may not want to move out of your house at a time when it would be advantageous to do so from a financial point of view.
This brings us back to the RRSP contributions you make long in advance of retirement. No, you don't automatically have to put the maximum in an RRSP every year and, yes, you can skimp or skip years and catch up later. But by and large, regular RRSP contributions should be part of your financial routine.
The problem for home buyers facing a national average price of more than $277,000 is to afford a house, a decent lifestyle and RRSPs as well. If RRSPs are getting the squeeze, then you need to reprioritize.
Rob Carrick