* For many, residential real estate is biggest asset
* Diversify to limit risk of illiquid asset, advisors urge
* Houses not the winning bet many assume
By Andrea Hopkins
TORONTO, Jan 10 A long bull run in Canadian
house prices and painful memories of the 2009 financial crisis
have convinced many Canadians that their retirement dreams are
best left at their own doorsteps - a strategy that many
financial planners consider risky.
Indeed, more Canadians than ever are relying on appreciation
in the value of their homes to pay the bills in their golden
years. It's a trend that worries advisers, especially as savings
rates decline and more people say they are comfortable carrying
debt into retirement.
As the U.S. housing crash so painfully demonstrated,
property values can move in both directions - and quickly.
"It's the old adage -- don't put all your eggs in one
basket," said Chris Buttigieg, senior manager of wealth planning
at the BMO Retirement Institute.
Buttigieg says retirees may find it difficult to sell their
home in a market that's softening or to find somewhere
affordable to live after selling out. And it's just risky to
assume a single illiquid asset will fund what may be 30 years of
Pointing to a 2012 study he authored, Buttigieg said 41
percent of Canadians now consider equity in their home an option
to save for retirement and 47 percent said it is their biggest
While advisers may question the strategy - which after all
eats into their sales of investment alternatives - its
popularity is easy to understand.
Urban housing has experienced a long boom in Canada, with
prices doubling or tripling in recent decades even as stock
market portfolios slumped in the 2009 crash.
"The last 10 years has definitely not been a very positive
climate for financial assets," said Dylan Reece, a member of
Advocis, the Financial Advisors Association of Canada, and an
associate portfolio manager at Nicola Wealth Management in
Vancouver, who supports real estate investment in an otherwise
"At the same time, real estate has done extremely well, and
therefore it is natural for people to project that will
continue, and they capitulate on financial assets and say 'I'm
better off putting it all in my home.'"
But John Andrew, director of Queen's University Real Estate
Roundtable, said an asset that doubles in value over 10 years
isn't quite the winner it may seem.
After crunching numbers for annual returns of the Toronto
Stock Exchange and the Canadian housing market over the last few
housing cycles, Andrew said the two are in many cases a wash.
From 1981 to 2012, the TSX posted an annual return of 5.45
percent, excluding dividends. The appreciation in Canadian home
prices represents a 5.6 percent annual return. Booming cities
fared not much better, with a 6.17 percent annual return in
Toronto housing and a 6.43 percent annual return in Vancouver.
"You may think prices have gone nuts," especially if a real
estate investor is just looking at the booming market from 1997
to 2012, said Andrew. But when a longer cycle is considered, the
difference is almost nil, he said.
The benefits of real estate investing are widely accepted in
Canada, where home ownership rates approach 70 percent. In an
era where household debt is at historically high levels and the
discipline to save is scant, paying down the mortgage remains
the top priority every month.
"It is a forced savings vehicle, a roof over your head, and
a beautiful tax shelter," said Andrew. With financial
investments, you are paying capital gains or income tax when you
make money or cash out for retirement, while a principal
residence draws no tax penalties when you sell.
But a good investment is not the same as a good retirement
plan, said Mark Coutts, a certified financial planner with Sun
Life Financial Inc.
"Most people are much more comfortable predicting their
retirement age than when they will be ready to downsize," said
Coutts, noting the inherent timing problems with selling a home
just when a retiree is trying to cut living costs.
"The challenge is that while we like owning a home, it
doesn't produce income for us, and you can't sell it in pieces
-- it is all or nothing," agreed Reece.
Selling a home to fund retirement also means a retiree may
have to pay rent, or high costs in a nursing home, rather than
living rent-free in an owned home and hiring help. Some retirees
may be happy to move to a smaller property or take on a reverse
mortgage, but many may feel forced to sell at a less-than-ideal
Given growing evidence that the Canadian housing market is
heading for a price correction followed by a plateau that may
last for years, that ideal time may be now for the bulge of
babyboomers who expect to retire in the next decade.
"For those who find their home to be their most significant
retirement asset, I suggest take the current opportunity to
downsize, free up the equity, and invest in income-producing
investments - bonds, preferred shares, income producing real
estate or dividend-producing equities," said Reece.
But while he recommends a diverse portfolio, Reece notes
financial advisers and experts with the big Canadian banks have
good reason to urge investors to focus less on their homes and
more on investing in traditional retirement vehicles such as
stocks, bonds and mutual funds.
"The banks have two conflicts of interest. The quicker you
pay down your mortgage, the less interest the bank will collect.
And then they want you to take that money and invest it, and
charge fees and commissions to help you do so. It is an
interesting double conundrum of conflict of interest."