For many retirees, it’s long been a simple calculation: sell the big house, downsize to a smaller property (possibly in a cheaper community) and pocket the equity.
But Canada’s soaring pandemic real estate markets have complicated that picture. On the one hand, mortgage-free homeowners have never seen such equity gains, making a case for liquidating the family home stronger than ever. On the other hand, real estate markets have become ultra-competitive for both renters and buyers, making the logistics – and benefits – of downsizing less certain than before.
“When municipal assessments came out at the beginning of January, there was a bit of shock for some of my clients,” says Midori Hillis, a senior financial adviser with IPC Securities Corp. in Victoria, who works with seniors on retirement financial planning. “Clients were like, ‘Wow, my house is worth $2.1 million … Let’s see what my retirement looks like with a few hundred thousand more in my portfolio if I were to downsize.’”
Many clients, she says, saw in that potential windfall a more active retirement, potentially packing in more travel, more leisure and more fun, especially if they relocate to a less-expensive community.
But finding those less-expensive communities is getting tougher.
“I see this a lot,” says Ayana Forward, an independent fee-only certified financial planner in Ottawa, who specializes in retirement planning. “They don’t want to live in the city any more; maybe they want a cottage property or something in a smaller town, but they’re experiencing the exact same thing as they would have in the city, bidding wars and competition and high prices.”
Sometimes, she says, clients are not downsizing so much as “side-sizing” to a different community.
To a large degree, of course, this depends on province and region. In some provinces, such as Alberta, many rural communities have actually seen real-estate values falling in the past year. But in most of the country, rural and small-town property prices have surged at least as fast as big-city prices, eroding the advantage for urban downsizers.
For example, according to the Canadian Real Estate Association, prices in Metro Vancouver increased by 18.2 per cent between January, 2021, and January, 2022. But prices in smaller communities in the province rose even more: Victoria by 25 per cent, Kamloops and area by 26.3 per cent, and the Fraser Valley by 37.4 per cent.
In Southern Ontario, home prices in the Greater Toronto Area increased by 33.3 per cent, but prices in most smaller communities were up by comparable or greater amounts. And in Atlantic Canada – which has seen a dramatic price escalation in general – prices in the Halifax area increased by nearly 30 per cent, but the province’s retiree-friendly South Shore shot up by 56.1 per cent.
The urban-rural price advantage still exists, of course, but the gap has shrunk unless buyers are willing to go even farther afield.
On Vancouver Island, says Ms. Hillis, “prices come down a bit the farther north you go, but every community went way up this year. And once you get that far away, the weather is colder, transportation costs and groceries can be more expensive, access to medical services is less.”
One way retirees can sidestep the ultra-competitive property market is by renting. But here, too, the advantages may be less clear-cut than in the recent past.
Ms. Forward cites one couple she worked with recently who chose to sell their Ottawa-area home and rent, in part for a more flexible lifestyle. Their home’s sale price was $300,000 over asking, a windfall they chose to put into a dividend-investing account, the proceeds from which they put toward rent.
However, says Ms. Forward, “last month they called again and said they’re looking to buy.” In part, she suspects, this was due to higher-than-expected rental costs, around $2,800 per month.
For retirees who can continue maintaining their homes – and don’t want to deal with the hassles of relocation or tight property markets – a home-equity line of credit (HELOC) is another option to help take advantage of surging home equity. It’s a line of credit secured by the equity in your home, which can be accessed on an as-needed basis. Borrowers only need to make interest payments on the loan until they sell the home.
Marlene Buxton, a Toronto-based retirement-planning adviser, says many of her clients are reluctant to relocate, in part because they don’t want to leave family and social networks. Nor are they particularly enthusiastic about downsizing. She’s been recommending HELOCs to many of them.
“This gives access to credit at the lowest interest rate possible during retirement years, and it can be used all sorts of ways,” Ms. Buxton says. “To supplement income later in life, or pay to modify a house for people who want to age in place.”
Ms. Forward also recommends a HELOC and suggests setting it up before retiring. “It can be much more difficult to gain access to capital when you can’t show an income,” she says.
A related product is a reverse mortgage, which provides regular payments to homeowners out of the home’s equity. No interest payments are required until the home is sold.
“The problem there,” Ms. Buxton says, “is that there are a lot of fees to set up, the interest rates are higher, and unlike a HELOC you may be borrowing more than you need.”
And there is yet another way retirees are increasingly taking advantage of their surging equity, says Ms. Hillis: giving their kids a hand-up in the housing market, for fear they’ll never break in otherwise. In some cases, that can mean a big cash gift or a down payment taken out of the proceeds from a home sale.
She’s also seeing more creative solutions, such as helping a child buy their own home, then relocating to an in-law suite on the same property – a two-birds, one-stone solution.
“Of course, they’ll have to recalculate what they can do with their retirement,” she says, “but that’s worth it to them in this market, and their home value lets them – as long as they get along with their kids, of course!”