Soaring house prices shifted the way clients think about real estate, with some putting properties at the centre of their retirement plans.sesame/AFP/Getty Images
After Canada’s housing market rocketed to record highs in 2022, some of Nancy Grouni’s clients hoped to ride the wave and, eventually, cash in and help fund their retirement.
Now, as prices fall, the certified financial planner with Objective Financial Partners Inc. in Markham, Ont., is helping clients navigate a cooling housing market in the Greater Toronto Area.
“We’ve moved from a time when real estate prices were very robust, and it worked out well for a lot of clients,” she says.
“On the flip side, I’m now seeing certain situations in which clients have suffered as a result of not being able to sell their first or even second investment properties for the price they expected, and they were counting on that to help fund their retirement.”
Propelled by low interest rates and the influx of immigration, the average national home price hit $837,400 in February 2022, a 58-per-cent increase – or more than $300,000 – from just three years earlier, according to the Canadian Real Estate Association.
“It really shifted the way clients think about real estate,” Ms. Grouni says.
Nationally, the average selling price has declined by about 20 per cent, to below $690,000, with the largest declines in the greater Toronto and Vancouver areas. While it’s difficult to predict whether waning home prices will persist, Robert Kavcic, senior economist at Bank of Montreal, said it could take five or 10 years from the peak before houses return to 2022 prices.
That has left some older clients scrambling, and some younger ones taking a more cautious approach toward home ownership.
The most troubling cases for Jackie Porter, financial planner and owner of Team Jackie Porter at iA Private Wealth Inc. in Mississauga, are clients who took on debt over the past few years, assuming they would be able to sell their homes for much higher prices.
“The assumption was, ‘I’ll refinance my house because it’s going to be worth that much more, and I’ll get a car or take the vacation I deserve,’” she says.
With rising property values, many Canadians tapped their home equity through home equity lines of credit throughout the pandemic to fund renovations or spend money on their homes and cottages, expecting the high sale price of their home to offset some of the extra debt.
She encourages clients to consider all options, including putting off their retirement or increasing their amortization to spend less on monthly mortgage payments.
“The reality is, some clients will reach their expected retirement age carrying a mortgage,” she says. “At that point, you have to explore your options, including working part-time in retirement, reducing your lifestyle expenses, or even selling and renting, taking that equity to pay for your lifestyle in retirement.”
Ms. Porter has also seen some clients sell their homes and purchase homes with their kids to split the payments.
“What many people find is that by reducing their lifestyle cost, downsizing, or moving in with children, they’re able to generate enough income through other investment assets that, along with their Canada Pension Plan payments, generate enough money to last them until they’re 95,” she says.
Ms. Grouni is also in favour of clients being exposed to other asset classes as part of a holistic financial plan.
“For so many years, clients thought of real estate as the only investment vehicle,” she says.
When Jay Gangnes, financial planner and founder of Ocean 6 Wealth Advisory, a fee-for-service financial planning firm in Vancouver, models financial plans for clients, he accounts for a 3.5 per cent annual rate of return on real estate.
“It’s pretty standard across the industry,” he says.
A good financial plan deters clients from being overly optimistic about one asset class, he says. And clients who have that standard rate of return modelled into their plans have remained in good financial shape, despite the short-term fluctuations in real estate prices.
Beyond real estate
Mr. Gangnes has also noticed a shift in how his younger clients view home ownership. “Home ownership is no longer a core investment for some younger people.”
He attributes part of the shift to high home prices, as the cost of the average home relative to income rose significantly since 2008, even with the recent dip in prices.
While younger clients aren’t avoiding homeownership altogether, he’s noticed they’re more focused on other priorities, such as travel and enjoying their social lives.
He tells clients who are considering purchasing their first home to limit housing expenses to 50 per cent of their after-tax cash flow. That includes mortgage payments, property taxes, insurance and maintenance.
That way, housing doesn’t get in the way of other retirement saving contributions, he says.
“Owning a home in Vancouver or Toronto results in having a lot of your wealth tied up in a home,” he says. “So, I ask clients to consider what they’re passionate about, and what they’ll be sacrificing if they do purchase a home.”