Who needs to save for retirement when your home is the new RRSP?Welcome to Canada, where debt is the new savings and spending is the new investment. For F&%$'s sake people, when are you going to learn that wrapping a car loan into your mortgage or spending 65% of your take home income on shelter does not equal the smart financial planning you think it does?
"House prices will not go up forever," says Mr. Tal... "Home valuations can go down," he cautions.
"If planning is done right, it shouldn't be a large part of your retirement..."
"People are buying houses that are larger than they can afford and larger than they need."
Canadians [have] so much wealth invested in their homes that an increasing number are turning to reverse mortgages to fund retirement.
"Our recent research indicates 77% of senior net worth is in home equity, and 17% view their home as their retirement fund,"
84% of seniors don't want to leave their home.
On a $400,000 house, you could probably get a reverse mortgage of $120,000, at an interest rate of 4.9%. You don't have to make payments, but that debt will grow quickly.
More must reading (H/T to Reid)
14 comments:
Gerroff my lawn you stupid homeowners! ;)
On a more serious note, this shows we can't rely on boomers to trigger some sort of housing collapse as they all scramble to downsize at once. They will fight tooth and nail to keep their homes as long as they can. That means continuing to work if they must, and taking out reverse mortgages otherwise.
Either way that house is not going on the market for at least another 10-15 years.
Yesterday it was BCAA cutting it's travel centers, today it is Carmmanah cutting 20 jobs. So we get 20 jobs here, 30 there, a few hundred in the civil service,these all keep adding up. Sooner or later 1000 people have employment probs,downsizing is in vogue and people still don't get it.
"Solar lighting company Carmanah Technologies Corp. has cut 20 employees from its payroll -- including 14 at its Vic West head office -- after failing to make aggressive sales targets.
Jobs were cut in sales and marketing, administration and accounting."
Thinking about Reverse Mortgages, in principle they are a poor idea, but wouldent they actually be at about their best right now?
I am sure the institutions that sell them are going to gouge, but with interest rates this low, shouldn't you be able to get a good payout from them right now?
Is there anywhere to run quotes online? I would be interested in comparing to say an annuity.
Basically, you could either:
A) Sell your house, downsize/rent and purchase an annuity with the remainder
B) Take out a Reverse Mortgage and still live in your home.
Annuities have the highest payout of any similar income vehicle but are performing poorly from a historic point of view because rates are so low. I want to know how they compare.
For many people selling the home is the better option if only because people get tired of maintaining a house. The various expenses, the work, some get tired of stairs, the lawn, etc. And they don't have kids so they don't need the expense.
I don't know the stats by my seat-of-the-pants estimate is that most people know reverse mortgages are a bad deal. Everyone in my family near retirement age is selling their place and buying in a cheaper location.
OK I am going to try and answer my own question.
For example, male age 65, sells his home and nets $500,000. His life expectancy is age 85 so he wants at least 20 years of income guaranteed.
Annuity option: Single life annuity, 20 year guarantee period, single premium of $500,000.
Monthly Income $3022.36 before tax.
Reverse Mortgage Option: (I have no knowledge of this product I could be doing this totally wrong.)
calculator from HERE used.
INPUTS
Value of Home: $500,000
Initial lump sum: $1000 (minimum)
How Many Years in Monthly payments: 20
Interest rate on loan: 6%
Monthly fees: 0
Establishment cost: 0
Assumed annual increase in home value: 3.5%
Calculated MAX monthly payment: $2100
The Annuity blows away the Reverse Mortgage as far as cash flow is concerned.
BUT
- The annuity is taxable, the loan I believe is not taxable.
- With the reverse mortgage, you still get to live in your house, with the annuity you have to downsize or pay rent out of the income generated.
-The Reverse Mortgage assumes a constant increase in home values, if appreciation was 0, reverse mortgage income falls to $1100/month. The annuity is guaranteed never to decrease regardless of market forces.
- If you are still alive after 20 years, you will be forced to sell your home with the Reverse Mortgage. I imagine there might be a lifetime reverse mortgage, but it will drop the monthly income. With the annuity you will continue to receive an income as long as you live.
A lot of factors to consider, if you remove the emotional considerations and look at simply the dollars and cents. After income tax and rent for the annuity, and maintenance and property taxes for the Reverse Mortgage, lets call both options relatively even.
A reminder that this is a point in history when Annuities are at their weakest and Reverse Mortgages are at their strongest, and they just break even.
A whole heck of a lot of E.O.&E.
Leo_S wrote:
"On a more serious note, this shows we can't rely on boomers to trigger some sort of housing collapse as they all scramble to downsize at once. They will fight tooth and nail to keep their homes as long as they can. That means continuing to work if they must, and taking out reverse mortgages otherwise."
I don't think they all have to bail-out of their homes at once, rather it is the fact that they will need to convert home equity into retirement income at some point in the near future that is likely to place a continuous downward pressure on home prices.
The first of the Boomers will hit 65 next year and the pace will accelerate over the next decade. Many boomers have little retirement savings other than their home, so it may not matter that 84% would *like* to stay in their homes - they may have no say in the matter if they need to tap that equity in order to pay their bills.
This sort of negative demographic effect on future home prices has been described in an academic article I read once, but unfortunately I don't have the link handy. The author was positing a long-term downtrend in US housing prices as a result of demographics. On this side of the border, Garth Turner is making a similar argument: that boomers have too much equity tied-up in one illiquid asset and will eventually need to convert that equity into cash.
When my dad died a number of years ago my mom was left with having to sell her house in order to deal with debts. She did not want to move or downsize to a condo as she loves where she lives. Although a reverse mortgage was a bad economic choice (i.e. higher interest rate) it was the best choice for her given her situation and desires.
She has now lived in that house with a reverse mortgage for almost ten years and it has been a blessing for her. In the meantime her house has increased in value by about $700k in that same period of time.
So although I do not like reverse mortgages they can be very useful given peoples circumstances.
kabloona, the article you're referring to is probably "Generational housing bubble" by Dowell Myers and SungHo Ryu of the University of Southern California. There was a write-up called "Baby boom and bust" in the Economist, Jan 17th, 2008. But a Google search will bring up a lot of similar articles dating back to 2000.
@kabloona
"I don't think they all have to bail-out of their homes at once, rather it is the fact that they will need to convert home equity into retirement income at some point in the near future that is likely to place a continuous downward pressure on home prices."
Not if they don't sell their homes. If they take a reverse mortgage, they keep their homes and don't affect house prices one iota. Of course a reverse mortgage is likely not the best financial choice, but it might be the only option to stay in a house.
If you've got only 15-20 years left to live, you're probably more concerned about being able to live in your house and enjoy your remaining years instead of exactly how much money you'll have when you're dead.
By the way, if a significant number of boomers do sell their house, it could be an interesting phenomenon where SFHs collapse in value, while the condo market explodes.
"But that's exactly what Canadians are doing. Mr. Tal says that as of the second quarter, 38.5% of Canadian wealth is tied up in home ownership, a huge percentage when one considers it in a historical context. Just 20 years ago, the percentage of wealth in home ownership was about 16.3%."
I find this quote form the article interesting. The 38.5 percent must be due - to a significant amount - to recently inflated house prices. I suspect that the asset base of people increased with approx inflation levels and the rest is due to increased housing prices. I also suspect you should be able to see that in stats canada data somehow (but don't have the time/willingness to dive into that. I am surprised that Tal does not mention that. Now that I think about it more... with some people the situation will likely be worse b/c of overextending themselves on a mortgage.
OK Bears
What if we're wrong? What if, relative to the rest of the world, Vancouver and Victoria are still a good deal, so people from Europe and other expensive spots are enticed here by what they see as cheap digs?
Or what if, with all the money floating around in this city, the "haves" buy up houses when the market softens so the "have nots" never see prices soften enough to get in?
What if the government, in a desparate attempt to derail a housing crash, keeps interest rates low or keeps CMHC floating to even higher heights?
What if boomers divest themselves of real estate to hungry grandchildren rather than facing the open market?
What if I missed my chance three years ago, waiting, then last year, waiting. I feel like I'm stuck in an existential Beckett play, "Waiting for the low..." What am I doing? Just waiting....
And packing my bags while I wait....
"What if the government, in a desparate attempt to derail a housing crash, keeps interest rates low or keeps CMHC floating to even higher heights?"
No matter how bad things get, you're still better off with cash in the bank than being heavily leveraged. It's aggravating and unfair that the rest of us get stuck with the bill when someone else can't pay their mortgage, but it's worse still to be the person who has to declare bankruptsy.
"Vancouver and Victoria are still a good deal, so people from Europe and other expensive spots are enticed here by what they see as cheap digs?"
Vancouver and Victoria have some of the most expensive real estate in the world, not much cheaper than most of Europe.
"Or what if, with all the money floating around in this city, the "haves" buy up houses when the market softens so the "have nots" never see prices soften enough to get in?"
If this were possible why wouldn't these "haves" have bought up all the housing stock 6 years ago?
"What if boomers divest themselves of real estate to hungry grandchildren rather than facing the open market?"
And then all the grandchildren and their families move into the house together or would they dump it on the market?
"What if I missed my chance three years ago, waiting, then last year, waiting."
There is only one option for you, get out there and buy something, this weekend if possible, hurry you must not suffer in limbo any longer!
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