So long second home

If there’s one thing Canadians like to talk about as much as the weather, it’s housing prices.

Everyone knows that housing costs are still rising, but if you need some proof then look at the latest stats from the Canadian Real Estate Association.

In December 2014, the average Canadian home cost $405,233, up about 3.8% from the previous year. Hot spots such as Toronto and Vancouver saw prices rise by 7% and 4.3% year-over-year, respectively.

While soaring prices impact first-time homebuyers and indebted Canadians, they also have a significant effect on how people retire.

At one time, everyone talked about downsizing — selling a house and moving to a quaint condo in the heart of the city. Now, though, that second home is nearly as expensive as the first.

This is a regular topic of conversation for Scott Ward, an Oakville-based advisor with Edward Jones. He’s currently working with a client who had always planned to sell her house in Mississauga and move to a place in downtown Toronto.

With the cost of the condo nearly the same as what she can make from selling her house, that plan is now up in the air.

“We’ve run the numbers and it’s going to be hard for her to buy,” he says.

Downtown dreams

Downsizing has been a goal for many soon-to-be retirees and it’s easy to see why. If the mortgage is paid off, then they can pocket some dollars, move to a location with amenities they didn’t have in the suburbs, and be closer to top-notch health-care facilities.

Now, though, the price gap between condos and houses has tightened, leaving retirees with far less savings than they had planned. The average Toronto condo, for instance, was $367,199 in Q4 2014, according to Toronto MLS; that’s about only $100,000 less than the average house price in Mississauga.

Anyone who thinks that downsizing is going to be part of a retirement plan these days may be sorely mistaken.

“Younger clients especially view downsizing as a major part of their retirement plan,” says Ward. “They may be (surprised) when they hit retirement age.”

Rent and save

A retiree who moves from, say, Toronto, Vancouver or Calgary to a smaller locale an hour or so away may find more affordable housing, but since most people want to do the opposite, they really have only one option: rent.

That’s the approach many of Ward’s clients are taking. They sell their houses and find that cushy condo that they can rent. Then they take the money from the sale and invest it in stable, cash flow–generating investments. The income from those stocks and bonds goes toward paying the rent.

It also helps that their money isn’t tied up in an expensive property. That was less of an issue in the last decade, but it may be a problem today.

Housing prices have soared over the past 10 years, so it has been fairly easy to make a return on real estate. While prices are still rising, the chances of them climbing as much over the next decade are slim.

“I don’t think we’ll see a crash, but most people don’t think we’ll see the same appreciation over the next 10 years as we saw over the last,” he says. “I’m not looking at (real estate) as an investment at all.”

While it may hurt to give up the downsizing, second home-owning dream, in this environment, it may be better to have access to cash instead of a new condo.