A 'for rent' sign is displayed on a house in Ottawa on Oct. 14.Sean Kilpatrick/The Canadian Press
If you’re a millennial or member of Gen Z, the biggest financial non-event of the decade is the housing market correction.
High mortgage rates cancelled out affordability gains from falling prices in the past year, and now prices are showing signs of growth again. It’s not too soon to revive the national dialogue on what it means to this country if young adults cannot afford to buy and own homes.
Retirement is a timely place to start the discussion. A recent study by the pension and HR consultants at Mercer Canada found that people who rent throughout their careers must save 50 per cent more than homeowners to have a sufficient retirement income. Renters need to save eight times their salaries and retire at 68 to be ready for retirement, while owners must save 5.25 times their salaries and can retire at 65.
A renewed rise in home prices would inflate the number of renters, which means more people needing to save extra hard for retirement. With rents soaring by double-digit amounts over last year, this task will be impossible for some. Consider that if you’re looking forward to a new housing boom and want governments to be hands-off on housing.
Average rents across Canada rose 1% between February and March, report says
Let’s not get too hung up on pitting renters against owners, though. In an expensive housing market, both groups are going to have a hard time saving for retirement. For owners, perhaps harder than the Mercer study suggests.
A lack of home equity is one reason why renters are at a disadvantage in Mercer’s analysis. But the bigger factor is that they have to pay rent in perpetuity, while homeowners typically pay off their mortgages at some point and get to live “rent-free.”
Owners with a paid-off mortgage do avoid rent, but they must still pay property taxes and the costs of maintenance and improvements. The Mercer study did not give these costs special consideration, as it did for the cost of rent. The implication here is that annual living costs for owners could be closer to those of renters than supposed.
Owners do have a retirement saving advantage in being able to access their equity by downsizing to a cheaper home. But many owners don’t want to downsize or find little equity left over after they move. In that case, they have to access their equity via a home equity line of credit or reverse mortgage and pay interest.
Mercer suggests renters will face challenges in saving enough to retire, in part by running a higher risk than owners of accumulating debt. We can add high monthly rental costs to the financial burden on renters, especially with increases running at roughly 16 per cent on a year-over-year basis nationally on Rentals.ca.
The debt burden on owners should not be underestimated, though. Home prices came down a lot, but they’re still expensive in relation to income. With today’s high interest rates and troublesome food inflation, some households may need to take on debt to cover expenses. It’s also true that where there’s a homeowner with equity, there’s often a home equity line of credit with a balance owing.
Still, there’s no getting around the Big Win of home ownership, which is selling a principal residence tax-free. A renter’s investment gains will be taxed at one point or another unless they’re in a tax-free savings account, with a current annual maximum contribution of $6,500.
In the Mercer study, it was assumed that both renters and owners start saving an aggressive 10 per cent of pre-tax income at age 25, with a starting salary of $60,000. Some of this saving could be contributed by an employer offering a retirement savings plan or pension. The house cost used in the study was $500,000, while rent was set at $2,000 and not indexed to inflation. The mortgage rate for the owner was set at 4 per cent, and investment gains were pegged at about 6 per cent before age 65 and 4.25 per cent afterward.
There’s lots to argue over in these numbers, but there always is when comparing renting and owning. Something we can all agree on is that renters have to work extra hard to save for retirement. Fortunately, there’s a way forward.
As expensive as renting is, there are no property taxes or home maintenance/improvement costs. A renter who saves and invests the equivalent of these costs has a chance to build wealth that adds up to a much more accessible but also more heavily taxed version of home equity.
The Mercer study says today’s young adults will need eight times their salary to retire at 68. By that time, working to 68 will be normal. Just like living to 98.
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