Falling house prices and your retirement: How worried should you be?

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House prices more than tripled from 1999 to 2019. Guess what that meant for the financial well-being of retirees soaking up all that growing home equity?

“The overall effect when we look at their standard of living in retirement is very modestly upward – it’s almost flat,” said Colin Busby, co-author of a new study titled Canadians’ Wealth Around Retirement: What Decades of Change Mean for Retirement Income Adequacy.

You say your house is your retirement plan? The study suggests you need some additional planning. “Principal residences are complex to use to finance consumption later in life,” it says.

The study, issued by the Retirement and Savings Institute at business school HEC Montréal, looked at how retirement was affected by wealth from both investment assets and houses. But it was mainly house prices driving the wealth gains we saw in soaring net worth numbers.

You remember net worth, right? It was one of the most quoted economic numbers as stocks and houses soared in price. Debt levels were rising, as they tend to do in Canada, but the value of assets owned by households was going up faster. Growing net worth meant that, on balance, those of us who owned homes were doing well.

Like so many of the financial trends in play in 2020 and 2021, net worth has reversed direction. Statistics Canada reported last month that average household net worth fell 6 per cent year-over-year in the third quarter of 2022.

This has to be discouraging news for boomers and other retirees who plan to use home equity to generate funds they can live on. But maybe falling house prices aren’t quite the problem they seem to be. If home equity isn’t that useful in improving living standards, then declining house prices don’t necessarily threaten your standard of living in retirement. The way forward: Build up your retirement savings via stocks, bonds, guaranteed investment certificates and funds – exchange-traded funds and mutual funds.

The HEC study says longer lifespans may lessen the benefit of rising home equity, the rationale being that the money from a home sale must last longer and longer. Low interest rates were also cited in the study because they yield a low return on the proceeds of a home sale. The study specifically looked at the return you’d get if you invested the proceeds of a home sale in an annuity, where payout levels track interest rate trends.

Interest rates have increased a lot in the past 12 months, and annuity payouts have done likewise. This could help juice the benefit you get from selling a house that has increased in value over the years.

But Mr. Busby said there are other challenges to turning home equity into a secure retirement. Say you want to sell your house and rent. In 2019, Canadians aged 55 to 74 who sold their homes and paid off their mortgages could generate monthly income of $1,750 by investing the remaining money in an annuity. That still fell short of the average national rent of $1,940 back then.

Interest rate hikes will have improved the monthly payout from that annuity, and house prices today are still higher than they were in 2019. But have you checked out rents lately? Double-digit increases are normal in many cities, with no relief in sight.

Downsizing can be a way to pull equity out of a home, but Mr. Busby said this isn’t as easy as it sounds. As a retiree, you’ll want a certain degree of comfort and proximity to family and friends. The cost of your new place – especially after realtor fees and land transfer taxes – may not leave much left over after selling your house.

Reverse mortgages and home equity lines of credit let you tap into the equity in your home while you live there. But both require you to essentially rent your own home equity at hefty interest rates of roughly 6.7 per cent for a HELOC and 7 to 9 per cent for a reverse mortgage, depending on the terms.

“It’s really hard to squeeze equity out of a house,” Mr. Busby said.

The HEC study reminds us that there are three pillars to retirement saving: government programs such as Old Age Security and the Canada Pension Plan, workplace pensions – admittedly, for a minority of workers – and personal savings plus home equity. Home equity by itself likely won’t suffice.

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