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House prices have been on a decade-long tear, led by big cities such as Vancouver and Toronto, making owners of even modest homes paper millionaires. For a surprising number of Canadians, ballooning property values have made the family home not only their biggest asset but the main source of retirement income.

A 2017 Ontario Securities Commission survey found that almost half of Ontarians aged 45 and up are counting on rising home prices to fund their retirement. The research also showed nearly 60 per cent of those preretirees surveyed have little or no retirement savings.

“It’s concerning,” says Sarah Milton, an account manager with Clearpoint Retirement Solutions in Edmonton. “If people aren’t saving, or they are starting late and they haven’t got a lot built up, it is hard to make ends meet.”

Most of her clients have workplace-based retirement savings plans, but she says only about 40 per cent of Canadian employers today provide them, which puts the onus on individuals to save toward their retirement – or hope the house does the heavy lifting.

The house-rich retirement dilemma

That warm feeling homeowners get as prices flare up around them in short, brutal bidding wars may be reassuring but doesn’t answer the real dilemma of the house-rich: how to monetize their one big asset, which they also happen to live in.

“You can’t buy food with your eavestrough,” says Kurt Rosentreter, a portfolio manager and certified financial planner with Manulife Securities Inc. in Toronto.

Mr. Rosentreter, who has clients in Vancouver and the Toronto area, says some find the cash windfall from selling their primary residence isn’t enough to both bankroll retirement and buy a smaller place in their desired location. Many of his clients want to stay close to their community, friends and family and access to good health care providers.

“What I am finding is they aren’t downsizing enough to leave a capital base to combine with their existing savings that will fund the lifestyle they want,” he says.

He provides the example of a retiring couple selling their $2-million home and buying a $1-million condo.

“You give me $1-million, I invest it in a balanced portfolio, I tell you to pull out 4 per cent a year [$40,000 pretax]. You are closer to being below the poverty line than the $120,000 per year you were making three years ago.”

There are always solutions, he adds, but most clients nearing retirement don’t want to hear what they are, which include moving out of a larger city to a small town, drastically paring back their lifestyle in other ways, or even renting.

There are also the options of saving more, working longer, or a combination of the two, which also don’t often go over well.

“You’ve left yourself no other choices, unless you work somewhere that you have a $100,000-a-year pension or you married a teacher with a pension. Then you have more choices.”

More reasons why your home is a bad retirement plan

The strategy of betting the house will fund your retirement also breaks a few general investing rules, including a lack of liquidity and diversification.

The house-rich couple with no retirement savings has only one illiquid asset, which they may be forced to sell at a time that’s not of their choosing, such as in a depressed real estate market. (Houses are generally the definition of an illiquid, or hard to sell, asset, although in today’s overheated Canadian markets they’re selling more like liquid assets such as stocks and bonds.)

The other warning is that people shouldn’t have all of their retirement eggs in one basket.

“It’s not only one asset class; it’s on one street. It’s hard to be more concentrated than that,” says Scott Plaskett, chief executive officer of Ironshield Financial Planning in Toronto.

Mr. Plaskett says relying on your home value to retire on is “hugely risky.”

Ultralow interest rates have fuelled the current real estate boom across much of the country – a phenomenon likely lengthened by the economic downturn caused by the pandemic – but it may have reached its limit.

“There is another shoe that has got to fall,” Mr. Plaskett says. “The governments can’t print this much money without creating an inflationary environment. Eventually, that’s going to catch up to us and the only way to curb inflation is to slowly raise interest rates.”

Warren Buffett said this month that his investment company, Berkshire Hathaway, is now seeing “very substantial inflation.”

Higher interest rates will likely kill the real estate boom and put the home-based retirement plan in peril.

“You run the risk of the value of your home actually declining until interest rates stabilize,” Mr. Plaskett says.

The house rich and savings poor may be able to wait out a short-lived real estate market collapse by continuing to work past their planned retirement date or through a reverse mortgage or home equity loan. But those are all stop-gap measures.

Mr. Rosentreter of Manulife is vehemently opposed to the idea of adding new debt by borrowing against the home’s equity to ride out a housing market decline.

“You just lost [a chunk] of your home value. And now you want to add debt on it? No,” he says. “[The] reality is that if your home is your retirement plan and we have a major correction before you could materially downsize, then [you need to] keep working.”

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