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personal finance

Hillary Fox

We all know someone who's worn love goggles. They start dating someone new and their whole world starts revolving around that special someone who can do no wrong, even though everyone else seems to think otherwise. Once the honeymoon phase is over, the goggles come off, a dramatic breakup ensues and suddenly everything seems so clear. "Why didn't you guys say anything?" the friend asks. Human psychology is a powerful thing.

Meet Ben Rabidoux. He's a friend who has been trying to warn Canadians about the love affair we have with home ownership. Mr. Rabidoux is an analyst with M Hanson Advisers, a U.S. research firm that caters to institutional investors. His website,, provides easy to digest graphs that essentially explain themselves, but he also weaves together a sobering new reality we may soon be facing. Already offended by the premise? He's used to it.

Here are a few observations of hard data from his site:

In 1975, the average size of a house in Canada was 1,050 square feet. Fast forward to 2010 and new homes being built almost doubled to an average of 1,950 square feet. This increase in house size is accompanied by a decrease in the average number of people living in a household. In 1971, it was 3.5; by 2006, that number fell by a full person to 2.5.

Whereas in 1999 the price of a home was 3.2 times income, this had ballooned to 5.9 times income in 2010. Essentially, the amount of money we are willing to pay for a house has increased much faster than our incomes. Instead of buying beer we've switched to champagne, but we can still only afford beer.

But wait, there's more.

Research suggests that people reach their spending peaks at age 46, then spending decreases as they start to pay off debts and save for retirement. The youngest boomers turned 46 last year. That means the pig in the python should be slowly moving from spending to saving for the next two decades.

The problem is that if Canadians approaching retirement age feel as though they haven't saved enough for retirement, they will likely turn to their fallback plan – downsizing their homes to free up cash. TD Canada Trust recently released a survey indicating that only 43 per cent of boomers had a financial plan. Given the growth in housing prices and the rate of home ownership, it's very likely that this large population segment is going to have a considerable impact on supply and demand for real estate in Canada.

Those who resist the urge to keep up with the Joneses will be better off. While there might be selling pressure for the bigger homes as retirees downsize, they are downsizing into the more modest homes, which provides some buying pressure for smaller houses.

Add it all up, throw in the highest debt-to-income ratios in history for the average Canadian and the long-term prospect of interest rates rising and it's pretty easy to see why Mr. Rabidoux's website could become incredibly popular after the fact: He's trying to point out what the love goggles may be overlooking.

It's possible we could be looking at a two-speed housing market over the long term. Prices for larger homes may cool off as boomers downsize and smaller homes may benefit, which means moving to a house more within your means is more important than ever – just in case the Canadian love affair with real estate turns sour.

Preet Banerjee, B.Sc, FMA, DMS, FCSI, is a W Network Money Expert, and blogs at You can also follow him on twitter at @PreetBanerjee

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