Conditions in Canadian real estate mean downsizing or borrowing against property may not be enough for retirees
The trend of tapping home equity in Canada has been gaining steam in recent years, particularly among retirees who need extra liquidity. But a weaker economy and an uncertain outlook for Canadian real estate means that such plans may not be as feasible they once were.
“[T]he Covid-19 pandemic highlights how the home-as-piggy-bank strategy can come up short,” said Wall Street Journal columnist Glenn Ruffenach.
As Ruffenach noted, most retirees and near-retirees hoping to tap the value in their real estate can either trade down to a smaller home, or borrow against their equity. If they successfully sell their large homes for a profit, they can augment their nest eggs as well as lower their annual homeownership expenses.
But Ruffenach pointed out that the pool of potential U.S. homebuyers in 2020 and beyond may be considerably smaller than in previous years as a surge in unemployment, economic uncertainty, and other threats brought about by the coronavirus take hold.
Canadians are facing the same challenges, along with household debt that was already at critical levels even before the pandemic came along. Data from the Canadian Real Estate Association (CREA) showed there were just 16,612 seasonally adjusted sales last month, marking the worst April for the sector since 1984 according to Better Dwelling.
And while the use of options such as reverse mortgages has been on the upswing in Canada, Ruffenach noted that a full-blown recession could devastate home values, which in turn would significantly decrease the amount of money retirees can pull from their property.
At the moment, the outlook on Canadian real-estate prices is mixed at best. In a rundown of forecasts, Better Dwelling noted that TD, Scotiabank, and RBC all predicted price increases in the next few years due to an economic recovery; Royal LePage, CIBC, DBRS, and Moody’s, meanwhile, took bearish positions, anticipating drops in real estate prices ranging from 3% to 30%.
“If you must trade down, try to do so sooner rather than later,” Ruffenach wrote in the Journal. “Given that many retirements today will last 20 years or more, it’s never too early to reduce expenses and shore up savings.”
