It used to be that buying a home was a solid investment in your retirement. Simply purchase a fixer-upper, restore it to it’s former glory, incorporate some modern amenities, and presto-changeo: 20 years from now you’ve got yourself a nice, big next egg. However, things have changed, leaving many mature homeowners facing a frustrating reality.
According to the Bank of Montreal, about a third of Baby Boomers plan to sell their home to fund their retirement. Unfortunately, the questions remains as to whether or not there will be enough buyers capable of purchasing these properties as more and more seniors begin to downsize. An oversupply of houses could ultimately result in a price plunge, leaving many retirees high and dry.
An Aging Population
The Canadian real estate market is becoming a riskier investment every year that Boomers get older. As a greater percentage of the population ages, more and more Boomers will opt to sell their homes, putting increased downward pressure on home prices. This stress, coupled with tighter lending standards and higher interest rates could make it more difficult for the next batch of home hunters to qualify for an affordable mortgage rate.
The BMO survey suggests that 34 percent of homeowners are undecided as to whether or not they will sell their home before retirement. Many of these respondents admit they’re holding off on selling because they’re planning to use the equity in their home to help fund their retirement. Unfortunately, Boomers could find themselves in serious financial trouble if they reliable solely on their home to fund their golden years. The situation becomes even more dire when the home is highly leveraged.
How Age Impacts House Prices
The typical Canadian Boomer owns a 3,000 square foot four-bedroom home. In most cases, once the kids have flown the coup, these older couples will opt to sell their homes in order to downgrade into a more manageable 1,500 square foot condo. From there, the next downgrade is normally to a 500 square foot nursing home.
It’s this progression that will likely put a damper on home prices in the coming decades. It’s also the biggest reason why supply and demand will continue to rise in Canada.
According to Statistics Canada, the period of the Baby Boom lasted for roughly 20 years. During this period, more than 8.2 million babies were born, or roughly 412,000 a year. In 2008, by contrast, only 377,886 babies were born. Today, there are roughly 9.6 million Boomers living in Canada. That’s more than one quarter of then nation’s population. Not surprisingly, their spending habits and living arrangements will greatly impact future real estate prices and make the Bank of Canada’s goal of stable, predictable inflation difficult.
What About Immigrants?
According to Don Lawby, chief executive of Century 21 Canada, there’s one factor that many economist forget when considering a potential housing drop – immigration. Currently, there’s little indication that immigration is slowing in Canada. In fact, in places like Vancouver, immigrants have more money and more opportunity to buy the single-family homes that Boomers are looking to offload.
Doug Norris, chief demographer at Environics Analytics confirms Lawby’s hunch, stating that as long as we continue to bring in roughly 250,000 immigrants a year, there will be more than enough demand to keep the housing market strong.
Similarly, many Boomers are living longer and may not downsize as quickly as they have in the past. What’s more, eventually 20-something condo dwellers will outgrow their space and venture out into the suburbs to buy Boomer homes. Every other generation has followed this pattern, it’s not much of a stretch to say that the same will happen with Generation Ys.