You used to be able to afford both a house and a comfortable retirement in this country.
It's getting a lot tougher to do this today, and the latest election promise from the federal Conservatives won't help. They plan to raise the tax-free amount you can withdraw from your registered retirement savings plan to buy a first home to $35,000 from $25,000. In other words, they'd offer more room to plunder your own retirement savings to get into the housing market.
Unless your living is tied to the sale of houses, there's no good face to put on this news. It may strengthen an already pricey housing market, and it would certainly feed a developing financial imbalance in the country where people emphasize houses over investing. Memo to whoever wins the election: Encourage retirement saving and let housing take care of itself.
Under the federal Home Buyers' Plan as it stands now, you can withdraw up to $25,000 from an RRSP to buy a first home without paying any tax. The money must be repaid into the RRSP within 15 years, so it's not like you're stealing your own retirement money. But you are potentially impairing your future financial health.
If you're smart and fortunate enough to have significant money in your RRSP in your young adult years, you get to benefit from three or four decades' worth of compounding. Take the money out of your RRSP to buy a house and you waste that benefit.
You may also end up putting less away for retirement. Even with superlow mortgage rates, the cost of carrying a mortgage and other home ownership costs can suck all the oxygen out of your household cash flow. Saving for retirement could end up on your list of future projects, just after putting an island in your kitchen and a deck in the backyard.
The counterargument is that buying a house is a better way to build wealth than investing in an RRSP. As with so many of our financial assumptions in life, this one is backward-looking and of limited value in planning for the future. Houses have been a great investment because of a buying spree fed by a 30-year plunge in interest rates. It's a one-time deal. If you buy today, you could conceivably see no gains or even losses in the early going and then increases in line with inflation.
You can beat these gains easily by investing in your RRSP for the long term. An after-fee 5-per-cent annual rate of return, including dividends and bond interest, is certainly realistic. Yes, stocks are twitchy these days because of all the global financial worries out there – China, Greece, sinking oil prices and more. But weak stock prices are a gift to long-term investors. You buy low today and sell higher when you retire in 2050.
Let's say houses do better than RRSPs in pure price appreciation. Even then, houses come in second best. You can structure the investments in your RRSP any way you want – to grow over the long term, to pay out investment income on a regular basis or to be rock-solid safe and ready for you to withdraw any time you need money. House wealth is tied up in bricks, lumber and drywall. Unless you borrow against your equity, you have to sell the house to access your money (yes, your gains are tax-free, unlike RRSPs).When you do sell, most of the money will go toward your next house or a condo.
Thanks to the federal Conservatives, people who want to buy a first home already have a formidable friend in the tax-free savings account. The annual TFSA contribution limit was hiked to $10,000 from $5,500 in the last federal budget, which means these accounts are all the more useful for home buyers. The superiority of TFSAs over the Home Buyers' Plan was outlined in this column – it all comes down to greater flexibility for withdrawing and repaying the money, and the fact that your RRSP money is left for its intended purpose – retirement.
Back in 2009, the Conservative government increased the maximum allowable withdrawal under the HBP to $25,000 from $20,000. Let's call that increase an inflation catch-up for a program that was introduced in 1992. Jumping to $35,000, especially in a housing market as expensive as ours, is a bad idea. It's kind of a tax on retirement.
Rob Carrick