Is Your Home Both Your Nest and Your Nest Egg?

Is your home both your nest and your nest egg? HOOPP ran its annual retirement survey recently and almost 40% of home-owning respondents agreed that they'll be relying on the sale of their homes to set themselves up for retirement. Rob Carrick bluntly called this a "bad plan" in his column in The Globe and Mail on Monday.

Look, I get it –?Carrick's core message is that you need to diversify your investments, primarily by saving through tax-advantaged accounts like TFSAs and RRSPs. (He also mentions pensions but?only about 1 in 5 Canadians actually has one.) As a super-brief primer on modern portfolio theory, you take on risk that you're not compensated for when you don't diversify. This point may be lost on some homeowners –?but I doubt it's lost on 40% of them.

Plan E(quity)

Few people likely set out saying they want their home to be their retirement plan and then fastidiously work to over-concentrate their wealth in that one asset. That would be...strange? There's a pretty clear distinction to be made between the average Canadian homeowner and someone YOLOing their life savings on a meme stock.

Instead, our homes are becoming our nest eggs because of market forces and the tremendous amount of financial stress that Canadians are feeling. That same HOOPP survey identifies the rising cost of living as the top concern among Canadians. Wages not keeping up with inflation is the second-highest concern. Housing affordability, including the effects of higher interest rates on mortgage payments, is not far behind. Tellingly, "knowing where to invest your money" registered low on the risk of concerns –?perhaps because most would say that sounds like a nice problem to have. Costs are high, wages are stagnant and home prices have been rising faster than incomes for decades –?basically, money's tight. When you have limited capital to deploy, you have to start prioritizing.

The reality is that you need to live somewhere and so, if you have to prioritize one asset, your principal residence is an obvious one. You can live in it rent-free and the capital gains are tax-free (similar to a TFSA, except without the annual limit).* The rub is that, while you have to live somewhere, most people can't live anywhere.

According to the Canadian Chamber of Commerce, only 7% of employees in Canada can exclusively work remotely. So the vast majority of Canadians need to be within a reasonable distance of their workplaces, which tend to be concentrated in a few major urban areas. That means competition for homes –?and traffic.

If you worked in downtown Toronto and were looking for a discount on home prices outside of the city, you'd need to hop in your car (or the GO Train) and drive a long way to find it. Based on last month's benchmark price data from TRREB, a detached home in Newmarket was only 20% less expensive than one in Toronto. That puts you 1 hour from the downtown by train or 1-2 hours by car in rush-hour traffic. Moving to Innisfil could give you a further 40% discount over Newmarket, but now you're 100 km from downtown Toronto and signing up to spend 4-6 hours in your car on the days that you commute downtown.

So it comes as no surprise that some Canadians who could stretch themselves to buy a home closer to the city do so. They want to be able to do things like have dinner with their family, walk their dog and put their kids to bed instead of sitting in traffic or riding the train for hours each day. Of course, that additional financial commitment with their home means having less capital available to diversify their investments in TFSAs and RRSPs. In cases where Canadians are mortgaging themselves to the hilt to buy their first home, it may mean zero capacity to diversify for a while. And so the nest becomes the nest egg.

Tapped out

The challenge then becomes tapping into your home equity. For Carrick, the assumption that you'll be able to do that meaningfully is the flawed reasoning that makes this a "bad plan" in the first place. He's right that the current options aren't great.

To tap into your home equity today, you either have to take on debt (HELOC, reverse mortgage, etc.) or downsize. A HELOC comes with monthly payments that could become a serious cash flow commitment if you're tapping a sizeable amount of equity. A reverse mortgage avoids the monthly payments but comes with a high interest rate that could erode your existing equity until there's nothing left. With any debt product, you're also taking on interest rate risk – either with variable rates or when you eventually have to refinance. There is also something bleak about taking on a lot of debt in your early working years for the privilege of...taking on a lot of debt in your later years.

Downsizing has its own problems, chief among which is finding somewhere you want to live that is significantly less expensive than your current home. You probably like a lot of things about your current home and neighbourhood as well – that complicates things! It's also hard to downsize without incurring serious friction costs?like sale commissions, land transfer taxes and moving fees. Those costs eat into the equity you take out of your home.

What if there was a better way?

What Canadian homeowners need are better options, not to be told their plan is a bad one when their hands feel tied. So we're building a better option at Clay Financial.

We're working on a smarter way for Canadian homeowners to tap their equity –?one that doesn't involve debt, interest or monthly payments. Our Home Equity Sharing Agreement ("HESA" – rhymes with visa) will let Canadian homeowners tap into their equity in exchange for sharing in the future appreciation of their home when they ultimately sell.

Canadian homeowners can use the funds from a HESA to diversify their investments, supplement their income in retirement, eliminate debt, give a living inheritance or anything else –?all without moving or taking on debt. When you have the tools to reshape your home equity, your home can be both your nest and your nest egg.

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Thanks for reading! I'd love to get your thoughts in the comments below. To learn more about Clay Financial, you can visit our website. You can also follow us on LinkedIn for updates.

* Other government incentives steer Canadians toward homeownership as well, such as the Home Buyers' Plan, First Home Savings Account, First-Time Home Buyer Incentive and First-Time Home Buyers' Tax Credit.