A recent survey from the Healthcare of Ontario Pension Plan (HOOP) shows the family home has become a growing part of Canadian retirement plans.
About 62 per cent of respondents said home ownership is “a key part of their retirement strategy, either as a financial investment or a source of stability in retirement.”
It also found 44 per cent were depending on the sale of their home to finance their retirement, up from 42 per cent last year and 38 per cent in 2023.
Another recent report from RBC found nearly half of wealth accumulation in Canada has been driven by home ownership over the past three decades.
A primary residence is the largest single investment most Canadians will ever make and is key to most retirement plans. A home is like no other investment because it is literally the roof over your head. If the stock market goes bust, you still have a place to go to at the end of the day.
But if you set aside the emotional aspect of hearth and home, it is like any other investment because it can be expected to hold and grow its value over time.
Equity growth
According to the Canada Mortgage and Housing Corporation (CMHC), the average annual increase in property values over 20- and 30-year periods have always exceeded five per cent since the end of the Second World War.
That’s in line with much more volatile stock market returns for Canadians who invest for retirement through employer pension plans, Registered Retirement Savings Plans (RRSPs) and non-registered investment accounts.
Income generation
In addition to equity growth, home ownership pays a sort of dividend by providing rent-free living for the homeowner. Homeowners also have the option of generating real income by renting out space.
It’s a sort of dividend that has grown in value as rent prices rise.
Tax advantage
One of the biggest investment advantages to owning a home is a tax exemption on any gain from the sale of a principal residence. Half of any gain on any other equity investment in a non-registered trading account is taxed, and if it is in an RRSP, it is fully taxed when it is withdrawn.
The tax treatment on the sale of a principal residence is more like a Tax-Free Savings Account (TFSA), where gains are never taxed.
A good tax saving strategy in retirement involves withdrawing fully taxable income from an RRSP, company pension, Canada Pension Plan (CPP) or Old Age Security (OAS) at a low marginal rate and topping it up with tax free money from a TFSA, home equity line of credit or cash from downsizing to a smaller home.
How a home fits into a broader investment portfolio
While a home is usually the single largest investment in a retirement plan, it shouldn’t be the only one.
How much weight a home should carry in a portfolio depends on the individual property and the needs of the individual retiree. But if you want to measure it against some of the other holdings in a retirement portfolio, it’s important to know home ownership has unique investment risks.
While risk in a portfolio of stocks can be diversified across sectors, geographic lines and asset classes, your home carries the concentrated risk of one sector (real estate), one sub-sector (residential) and one geographic area (your neighbourhood).
Data on home values are based on averages and not all homes appreciate at the same rate or appreciate at all.
Putting your nest-egg in one basket could backfire.
