Canada's Housing Bubble

Analysis of the real estate bubble in Canada --

Treating your house as an investment Print E-mail

Mar 22 2012 Peter Watson

Today’s column comes with a strong recommendation to re-consider the value of your house and how that lower value may negatively impact your retirement.

For those who are over the age of 50, there should be ongoing planning of your anticipated cash flow during retirement.

How much cash will you need each year to maintain your desired standard of living?

The retirement planning process considers all sources of funds.

Retirement income typically comes from government plans like Old Age Security and the Canada Pension Plan, as well as employer pensions, investments accounts and registered plans such as RRSPs and RIFs.

In many cases, the eventual sale or downsizing of the family home is considered.

Perhaps at age 70 you will move to a less expensive house and additional money can be invested to produce retirement income. Then during your 80s the house might be sold.

From a planning perspective, the assumption of cash coming from your principal residence improves the cash flow projections.

However, one needs to be cautious with this.

Most people are aware their investment portfolio can decline in value and those same people often assume the value of real estate will not decline.

A few are so confident that they want to sell their stocks and buy a rental property so they can avoid the type of volatility we have experienced in the last several years.

Last Friday, the TD Bank published a report that warned the Canadian housing bubble was a danger to the economy.

If the housing bubble is a danger to the economy, it could be devastating to your retirement cash flow.

All of a sudden the value of the sacred principal residence is in question.

The bank may be wrong; however, the possibility of a less valuable house should be considered.

For those who will be hurt if their house value declines, we have a recommendation: Arrange a meeting with your financial advisor.

Adjust any previous retirement cash flow projections to include a significantly lower value when your house is sold.

You might have assumed the value of your house would be 30 per cent higher when it was sold.

Redo the calculation on your house being sold for 30 per cent less than the current value.

That will change the amount of capital you have to invest and therefore, change the cash flow that your capital can generate.

Depending on your financial position or your specific housing situation, other assumptions of the value of your house when it is sold might be appropriate.

If you have not done retirement cash flow projections, what are you waiting for?

Your financial security is your responsibility. You should initiate that conversation with your advisor if they have not already done so.

From an investment perspective, real estate is just one of many asset classes.

Historically, real estate has increased and decreased in value and in that regard it is no different than other asset classes.

For many investors, the value of their house is their most significant asset.

As a result, the value of your house will be a significant influence of your retirement security.

We recommend taking the TD Bank warning about potential declines in future house values seriously and include the possibility that the value of your house could be lower when it is sold during your retirement.

— By Peter Watson, MBA, CFP, R.F.P., CIM, FCSI.


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