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The dangers of using your home as your retirement nest egg

Gail Johnson

Somewhere out there, maybe on a block near you, is a couple nearing retirement who sees dollar signs when they think of selling their home. For them, that for-sale sign on the front lawn doesn't just represent a business transaction but rather the dream of living out their golden years in style by living off the proceeds.

Using your home as your sole retirement nest egg might be common a financial strategy these days, but it's also a risky one, say two Canadian financial experts.

"In the last five, 10 years we've seen real-estate prices go up dramatically, but they don't always go up," says financial advisor and portfolio manager Clay Gillespie, managing director at Rogers Group Financial. "Real estate is like any equity market; it will have its peaks and troughs.

"In the last five years housing prices have done better than most other assets; it seems like the only way you can make money. But that isn't always the case. It's a risky strategy because doesn't allow you to retire and generate income when you want to do it; you have to time it with the market."

Demographics will make home sales harder

Although many Canadians have done well in the recent past selling real estate, the strategy is only going to get dicier in the coming years because of shifting demographics.

When Baby Boomers are ready to sell, there may not be enough qualified buyers to purchase their homes, explains Assante Capital Management Ltd. senior financial planner Adrian Spitters.

The biggest group of potential buyers will be the Boomers' own kids, a group known as the Echo Boomers or the Millennial Generation. They're smaller in number than the boomers themselves, and many have stretched their resources to qualify for their first home using minimum down payments at historically low interest rates.

"They are now tapped out," Spitters says. "They will simply not have built up enough equity to even consider moving up when the Boomers are ready to downsize.

"When you have a potential mass wave of sellers trying to downsize their homes to shore up their retirement portfolio at a time when house sales are slowing and there are not enough buyers willing to or able to absorb the inventory of homes for sale, house sales will stagnate and prices will suffer."

Mortgages matter

Making matters worse is the fact that a lot of boomers will still be carrying a mortgage as they head into retirement. According to TD Canada Trust's "Boomer Buyers Report", only half of those surveyed have paid off their entire mortgage. Of those with a mortgage, three-quarters still owe 40 per cent, and one quarter still have a long way to go, having paid off less than 25 per cent.

"If they don't have much saved up for retirement and are still carrying a mortgage when they retire, how are they going to fund their retirement from their home? It only takes one marginal home owner who's desperate to push the prices down," he says.

"These retiring Boomers will have few options to fund their retirement. They will have limited ability to tap into their home equity to supplement their retirement income. This may leave them with few options, forcing them to sell their home, downsize, and pay off their mortgage. In some cases they may need to rent, since they may not have enough equity in their home to fund a retirement portfolio after downsizing."

Twenty per cent of Canadians are going into retirement with debt higher than $100,000, a Rogers Financial Group survey found.

"It's unwise to just use housing as your only means for saving for retirement," Gillespie says. "You have to do other asset classes. You have to have some government pensions, RRSP savings, and your own savings. There's no silver bullet.

"The problem with real-estate investment is you can't sell 1/20th of your home," he adds. "It's not the panacea people make it out to be."

Advice for first-time home buyers

For younger people looking to get into the market, Spitters suggests being patient and building up as much of a down payment as possible by maxing out tax-free savings accounts.

"There's a false belief that the government is going to keep interest rates low and that housing prices aren't going to fall," he says. "There's a mentality now that you better buy before you get priced out of market, but don't rush into it. That could be a financial trap for people with interest rates going up.

"Real estate is cyclical, just like the stock market."