In case you missed it: Canadian home sales are booming. Residential real estate hit record highs earlier this year, and a June report from RBC predicted prices will rise another 13% by the end of 2021.
That’s left advisors rethinking their approaches with clients looking to get into — and out of — the housing market.
London, Ont.–based financial planner Andrew Dobson used to treat down-payment savings as untouchable in terms of risk. That was when it was still possible for most clients to put $50,000 in an RRSP over two or three years and take advantage of the federal Home Buyers’ Plan. Now, clients need to save a lot more (and for much longer) to amass a down payment. Growing numbers are beginning to accept the notion that they may never be able to purchase a home.
That presents new challenges for investment professionals. How do planners account for a generation of clients who may never own a home — or who buy a house and end up so cash poor that they have no money to save for retirement?
Dobson, a financial planner with Objective Financial Partners, Inc., said there’s a real risk that advisors — especially those with higher minimums — may lose a generation of house-poor (or rent-poor) clients; robo-advisors or low-fee funds may fill that gap.
On the other hand, planners may benefit from advising clients who decide to stay out of the housing market and invest their money instead. With more to invest, those clients may have access, earlier, to higher-end products or discretionary portfolio management.
Whether or not a client buys a home, Dobson said his core approach doesn’t change: “It’s still going to be goals-based.” He starts with an emergency fund, and then builds a plan that takes into account risk tolerance, objectives, insurance needs and time horizons.
“If you’re risk tolerant and you have a long time horizon and your goal is retirement, then you will probably have good flexibility to go very high on the equity scale,” he said. “But in terms of portfolio construction, I don’t think that there’s any one investment strategy that’s going to be any different than traditional risk assessment.”
Julia Chung, co-founder and CEO of Spring Planning in South Surrey, B.C., said the boom may force clients to redefine their priorities. “The idea that you’re only a grownup when you own real estate is just a marketing slogan to convince people to get mortgages,” she said. “But real estate is not what makes a good life.”
For those dead set on home ownership, though, there’s no easy fix when the numbers don’t add up, said Ottawa-based financial planner Ayana Forward, with fee-only firm Retirement In View: “I can’t get you a mortgage if you don’t have the means to cover it. So, we look at other ways to build an asset base. If you really want to be in real estate but you can’t afford to buy a home, perhaps you invest in REITs, for example. It’s not a terrible thing to rent.”
For older clients, planners are increasingly advising on how to help adult children buy homes. “More and more, there’s no other way for their kids to get into the market, even if they’re employed with good incomes,” said Dobson.
But helping out the kids can have an impact on retirement projections, and planners need to factor those numbers into clients’ plans: Will they be able to travel as they had hoped to once Covid restrictions lift? Will they be able to spend as freely as they planned, or retire as early? If they had hoped to downsize from a large family home to a condo, what happens when any “extra” money from the house is funneled to the kids’ down payment?
Gone as well are the days when a gift of $10,000 or $20,000 could make a real dent in a down payment. Now, Chung said, $300,000 (or more) isn’t unreasonable for those with the means to give it.
With such substantial amounts, many of her high-net-worth clients prefer to co-sign their children’s mortgages rather than give the money outright. “The parents are now on title along with the children,” Chung said. That means the parent’s gift isn’t shared with the child’s spouse in the event of a relationship breakdown. “That’s a big deal for a lot of our clients who can afford it.”
Not every older client — even those who own their homes outright — can afford to give their children cash gifts. Still, their children may benefit further down the line from their parents’ estates. There may well be a growing demographic of first-time homeowners in their 50s and 60s who use their inheritance to fund the purchase, Dobson said.
For clients on the verge of downsizing and decumulation, Chung cautioned against counting on sudden increases in home prices to make a significant change in retirement plans or projections. That’s in part because condominium prices are rising in lockstep with housing prices, and a reduction in square footage doesn’t necessarily translate to a comparable reduction in price.
“We always encourage people to understand that the house you live in is not an investment, it’s a home,” she said. “We don’t rely on it in retirement income planning, because you need to live somewhere. Downsizing from a big home in the suburbs to a condo downtown tends to be fairly irrelevant to the income plan.”
The exception, said Forward, might be retirees who are planning to travel and/or spend a good percentage of each year staying with friends or family, and who therefore don’t need a permanent retirement home. They might be more comfortable with short- or longer-term rentals, options like recreational vehicles, or co-housing with other seniors or their adult children.
The boom is also discouraging would-be landlords from investing in rental properties, said Chung. Even with lower interest rates, prices are so much higher that clients are worried about breaking even.
“I’m doing so much more hand-holding,” said Meaghan Chomut, an advice-only financial planner based in Thunder Bay, Ont., who works exclusively with clients who have or want to incorporate rental properties into their financial plans.
With her clients anxious to get into the market, Chomut returns to her rule of thumb: rents need to be at least 1% of the purchase price or double the mortgage payment. “For a lot of places right now, the numbers don’t make sense — and forcing it or buying it anyway isn’t going to make the numbers make sense,” she said.