Our House, the gentle Crosby, Stills, Nash and Young classic – written, incidentally, by Graham Nash – strikes an emotional beat familiar to many homeowners or wannabe homeowners. The song describes an everyday scene yet it’s beloved by millions because, as the cliché goes, home is where the heart is. It’s also why decisions around selling or buying real estate, usually the biggest asset a person will own, go far beyond a financial transaction.
If juggling momentous estate planning decisions in the context of family memories wasn’t complicated enough, the current state of Canada’s housing market will make you feel like you’ve put your head in a washing machine.
The country’s biggest market, so hot for so long, is finally cooling as rising interest rates bite. Toronto home prices dipped again in September and have now fallen 17% from their spring peak, while the benchmark price fell to C$1.1 million, its lowest since last October.
Worryingly, an RBC Canada Special Housing Report1 on October 6, 2022, said the pain is far from over. With further rate hikes expected “we think the bottom is still some ways away”. There are areas of strength, however, like Calgary, which is benefiting from a much-improved provincial economy and rebounding in-migration.
In many other parts of Canada, though, rate increases and cost-of-living pressures brought on by high inflation mean nearly one in five Canadians are putting off buying a home. An online survey2 carried out by Royal LePage and Leger reported that for Canadians aged 18 to 34, 29 per cent said they were planning to delay or deprioritize homebuying.
Time to downsize?
Those young adults, however, have time to play with. For many retirees, the situation is more pressing. Typically, the play is a simple calculation: sell the big house, downsize to a smaller property (possibly in a cheaper community) and stash the equity. The decision to sell, so alluring in a soaring market, now has an element of doubt. Sell now or wait for prices to come back?
Of course, that’s only one part of the equation. Rising prices in historically cheaper areas have made it harder to afford to downsize where your want to. According to the Canadian Real Estate Association, prices in Metro Vancouver increased by 18.2% between January, 2021, and January, 2022. However, prices in smaller communities in the province rose even more: Victoria by 25%, Kamloops by 26.3%, and the Fraser Valley by 37.4%. In southern Ontario, where home prices in the Greater Toronto Area increased by 33.3%, prices in most smaller communities were up by the same or more.
All in all, the benefits of downsizing are less certain than before. The financial benefits of going rural still exist but the gap has shrunk unless, of course, you’re willing to venture farther afield. One solution is to rent, taking the sale windfall and putting it into a dividend-investing account, for example, from which you can use to help pay the rent. This gives retirees more flexibility but this strategy is clouded now too, with the inflation-fuelled rental market getting more expensive.
For those who want to remain in their home, a home-equity line of credit (HELOC), secured by the equity in your home, is a way to take advantage of your home valuation. Borrowers only need to make interest payments on the loan until they sell the home. In similar vein, a reverse mortgage provides regular payments to the property owner out of the home’s equity. No interest payments are required until the home is sold. But it pays to be wary – reverse mortgages are typically more expensive to set up and the interest rates are higher.
Of course, there is another solution that has grown in popularity – gifting. Providing the equity from the sale is large enough, and you have downsized or rented successfully within your means, many people are helping their kids on to the housing market by way of a cash gift or down payment. Some take this a step further by relocating to their kid’s new home and settling into a ‘granny flat’ on the same property. This, however, is not for everyone!
The cottage – sell or make it your main home?
For those fortunate enough to have a cottage or be looking to buy a second home to split their retirement locations, there are numerous factors to consider. For the latter, it’s vital to forecast the effects on your retirement cash flow, factoring in rising property taxes, travel costs and maintenance. You must also decide which property will be your principal residence and have a plan to pass on both assets as part of the estate. That’s because taxation rules allow individuals or couples to designate one property as their principal residence, which can be sold without taxes owing on its appreciation in value.
For some, selling the cottage is the best financial option – the kids have flown the nest, its value has soared, and mom and dad can’t be bothered with the drive anymore. But what makes logical sense is a painful emotional decision. It’s where your little girl took her first steps or where your sons used to push each other off the dock.
The key is to make sure all the family are on the same page – is everyone ok with the decision to sell or is the family hanging on to it for sentimental reasons or because they think the kids are more into it than they really are. Daunting property tax and maintenance costs might have some heirs waking up in a cold sweat. By letting the heart rule the head, you could be missing a significant windfall.
Take stock … literally
In a challenge to conventional wisdom about owning your own home and growing wealth, there is another option. Put the equity from your cottage or home sale into stocks. Yes, sudden market drops make the headlines and may not be good for those of a nervous disposition but a long-term view points to expected returns on stocks being higher than real estate.
The Credit Suisse Global Investment Returns Yearbook, which has tracked global investment returns for over 100 years, found that between 1900 and 2017, the average global return from owning a home was about 1.3%, while the stock market returned just over 5%. Of course, there is a valid diversification argument to be had for not leaving the real estate market for stocks but it’s worth remembering there are other options. For those who want to marry stocks and housing, there are also real estate investment trusts (REITs), which allow investors to benefit from income-producing real estate.
Whether it’s downsizing, renting versus buying, or selling your prized family cottage, the decisions weigh heavier than a pure financial transaction. That’s because, as Nash sang, whether you own a “very, very, very fine house” or have “two cats in the yard”, the emotional connection to your property runs deep and adds stress to the retirement planning. An independent advisor can help you develop a strategy that not only makes financial sense but is also right for you and your family.
CMT, CFTe, CIM, FCSI
Financial & Estate Planning Advisor