Boomers gambling home values will save them
Mortgage broker Steve Garganis sees more and more baby boomers adopting what he calls “the 10-year plan.”
It consists of buying up — not down — into the most expensive house they can afford in their 50s, even if the kids are gone, with the notion of cashing out as they ready for retirement.
“They’re pulling away from other investments that have not performed well and they’re saying let’s look at real estate, but from a long-term perspective with record-low interest rates.
“They’re thinking even if there is a downturn in the market, they’ll ride out the ups and downs over the next 10 years but they’ll build up equity faster.”
That nest-egg notion of home ownership could create a new kind of “retirement stress” among baby boomers who’ve largely abandoned the concept of a house as simply Home Sweet Home, warns a new report from the Bank of Montreal Retirement Institute.
It found that 40 per cent of Canadians surveyed, all of them over the age of 45, aren’t confident they’ll be able to save enough for retirement. Some 41 per cent said they see their house as “an alternative source of funding,” with one-third saying they’ve either sold their house or plan to sell to help bankroll the retirement they envision.
Some 87 per cent of boomers have seen their homes skyrocket in value, nearly half reporting gains of 50 per cent or more, especially in cities like Toronto, Vancouver and Calgary, the report notes.
But it also warns that demographics and economics could work against boomers and that home equity could shrink if the market softens, as some economists are predicting.
Just as the rush of boomer buyers helped drive house prices up over the last few decades, there’s a good chance they could drive prices down as they try to unload big, expensive houses that are simply out of reach of most younger buyers, especially when interest rates start to rise.
“The rally in house prices has given people the false sense of security that investing in a house is safe and an option to fund their retirement,” says Marlena Pospiech, a retirement strategist with the Retirement Institute, an arm of BMO Financial Group which offers financial advice and strategies.
“Baby boomers are facing unique challenges that previous generations did not that could impact house prices.”
Ottawa’s tighter mortgage lending rules are likely to hurt far more than just first-time buyers, the report notes. They could reduce the number of buyers deemed eligible for financing on those bigger, boomer homes; force more buyers to opt for smaller, less expensive houses and leave many unable to buy at all.
Yet despite these serious risks, “more and more Canadian boomers are approaching retirement with some level of debt, even though a growing number of them are uncomfortable about carrying debt in retirement.”
Household debt remains at record levels and insolvency rates have been rising among Canadians over 55, says BMO.
“While Canadians have enjoyed a stable housing market and increased home values, this should not reduce the role that personal savings play in retirement preparedness,” says the report.
Mortgage broker and financial counsellor Ross Taylor says he’s got several clients in their 50s who have bought bigger homes because they see real estate as the best chance to make the gains needed to compensate for the lack of adequate pension plans.
One couple didn’t consult with him before taking on a bigger mortgage a few years ago and, while he was alarmed, they saw the value of their home grow by almost $300,000. His biggest concern now is that they have no plans to sell and realize their gains, despite fears the market is softening.
“Many people would say there is something wrong with (buying up at a time when you should be shedding debt), but I would disagree, especially for those who don’t have a pension plan.
“Of course you hope people get out of debt, but a good percentage of people don’t have hundreds of thousands of dollars to set aside for retirement. I have several clients who have done this and it’s working for them.”