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High house prices do not derail retirement plans for most

According to the National Household Survey released in early September by Statistics Canada, few Canadians are overspending on mortgages. It found that 59 per cent of homeowners have a mortgage and just 26 per cent of them spend more than 30 per cent of gross household income on housing (Statistics Canada’s threshold for affordability).

Antonio Giordano/antonio giordano The Globe and Mail

Some people claim that rising house prices are preventing Canadians from saving for retirement. Not much money is left over after mortgage payments, they say. But there is little factual evidence to support this view.

According to the National Household Survey released in early September by Statistics Canada, few Canadians are overspending on mortgages. It found that 59 per cent of homeowners have a mortgage and just 26 per cent of them spend more than 30 per cent of gross household income on housing (Statistics Canada's threshold for affordability).

Doing the math, only 15 per cent of homeowners are paying too much for housing. Moreover, Finance Minister Jim Flaherty's tightening of mortgage-lending rules will likely bring this percentage down. Overall, this doesn't seem to be a crisis situation.

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Interestingly, the National Household Survey found that 40 per cent of renters spend more than 30 per cent of gross household income on housing. Perhaps we should be more concerned about rents being too high?

More likely, however, this overspending represents a lifestyle choice. And probably the same could be said of the homeowners whose mortgage payments are too high. Instead of living in a dwelling within their means, they reached for a fancier house or neighbourhood.

It could be that many of the "spendthrifts" are in occupations where they are confident of receiving good-sized salary increases. Yet others may be funding pension plans through payroll deductions at work, or prefer to do the bulk of their retirement saving later in life.

Whatever the motivation, it hardly seems rising house prices are endangering retirements. Quite the contrary: equity in a house can provide income for retirement through downsizing to rental accommodations (among other ways).

Indeed, a recent Statistics Canada study, The Adequacy of Household Savings, found that when financial and property assets are included in wealth, two-thirds of Canadians exceed optimal savings for retirement. For those below, most are low-income earners who can enjoy a retirement lifestyle substantially the same as their working-age years thanks to public pensions and benefits.

All this is not to argue in favour of higher house prices. A period of stable or much slower rising prices, as policymakers are attempting to engineer, would be welcome given the extent of past increases. But it would be misleading to suggest the price increases have put retirements at risk.

Larry MacDonald is a retired economist who manages his own portfolio and writes on investing topics. He tweets at @Larry_MacDonald

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