Cooling house market could undercut retirement plans

Investors hear it all the time: real estate is a sure thing. Or, at least, it's as close to a sure thing as can be expected; safer than going for a white-knuckle ride on the stock market and seemingly simpler than muddling around with bonds and RRSPs.

Property values, proponents of this mantra like to say, only partly in jest, will keep going up so long as we're making new people faster than we're making new land.

This is, experts warn, an over-simplification, and one which creates risk for those who plan to use real estate to bankroll their retirement.

A recent report from the Bank of Montreal says almost one in three Canadians, upon finding they do not have enough money set aside to retire, have sold their homes in order to generate more cash — opting for a smaller house, condominium or rental unit.

Downsizing after one's children move out makes sense. But financial planners warn that selling off real estate is no replacement for more conventional retirement savings, despite Canada's healthy housing market.

"Memories are short," says Peter Drake, vice-president of retirement and economic research at Fidelity Investments in Toronto. "That's especially true [in real estate] where we've had a long, good run in most of Canada. People tend to assume just because something's been true for two or three years that it's always been true."

Drake and his wife bought their house in the 1980s when rates were in the teens and low 20s.

"Now, people complain when rates get to five and a half [per cent," he says with a laugh.

Drake and others point to signs that the market is already cooling off and that shifting demands might further undercut the value of the exact sort of homes many aging baby boomers will be looking to unload.

Empty-nesters might go into retirement planning to sell the five-bedroom house in which they raised their kids.

"We've had a marvelous housing market for people who want to do that, but I'm not sure that's going to continue," Drake said. "I'm not a doom-and-gloomer on the housing market, but we're already seeing some softening in prices."

Demand for large, single-family homes is especially weak, agrees Cherith Cayford, a financial planner and educator with CMG Financial Education in B.C.

"There's going to be less and less demand for those," says Cayford. "A lot of people are looking at them to fund their retirements, so they should move on that sooner rather than later [before the value evaporates]."

Smaller and "reasonably priced" bungalows are a hotter item, at least near Ottawa where Cheryl Green operates her financial planning firm Counting Chickens, presumably because they are the sort of homes all those empty nesters want to buy.

Green understands the appeal of real estate, given that interest rates are at an all-time low and pay-outs from government plans and other investments have tended to track down over the decades. But she takes a dim view of clients who overextend on real estate — either because they plan to "grow into" an over-sized house or cash in upon retirement.

She is among those who say the value of real estate as an investment must be balanced against the need to diversify one's portfolio. People must also consider how they want to spend their golden years.

Retirement, says Drake, is about having choices — to have fun, travel, go back to school, etc. — and putting too many eggs in one basket runs the risk of limiting choices down the road.

"We always worry about cyclicality," Drake said. "Whether investing in the stock market, the bond market or the real estate market, we always worry about [clients] retiring in a down market."

An investor with a diverse portfolio has the flexibility to sell off some but not all of his or her assets. An investor who relied too much on real estate might be left with the all-or-nothing option of selling the house.

"You may be forcing yourself into a situation," Drake warns. "If you had less house and more in the way of other investments, you might be better off."