The article “The Retirement Downsizing Myth: No, Seniors Aren’t Moving In Droves — And That Will Affect The Housing Market” was originally published on Financial Post on October 20, 2020.
Retirement community developers and aspiring young homebuyers may be in for disappointment
Retirement community developers, for-profit retirement homes, and aspiring young homebuyers are all counting on aging seniors to downsize their homes. While some seniors will move to a smaller home, what if they do not downsize to the degree expected?
A recent survey by Ryerson’s National Institute on Ageing found that 91 per cent of respondents would try “to live safely and independently in their own home as long as possible.” The survey was conducted this summer, so the findings may be influenced by the impact of COVID-19 on retirement and nursing home residents.
However, Mustel Group and Sotheby’s International Realty Canada’s pre-pandemic 2020 Generational Real Estate Trends Report: Aging in Place revealed similar findings, with 86 per cent of boomer homeowners looking to live in their current home as long as possible.
Survey results about seniors’ intentions are interesting to consider, but statistics about what they are actually doing may be more insightful. In the 2016 Census, Statistics Canada found “seniors are less likely to move than the general population. In 2016, only 5.5 per cent of seniors 65 to 74 years old, and 4.7 per cent of those 75 years and older had moved compared to 13 per cent of the general population in the previous year.”
The seniors most likely to move were those who were separated, divorced, or widowed, suggesting unexpected life events may be triggers for moving in retirement as opposed to proactively downsizing as part of a retirement plan. If seniors are not downsizing in droves, there must be reasons, as well as ramifications, for the wider real estate market.
In Toronto, Canada’s biggest city, a municipal land transfer tax was introduced in 2008 in addition to the existing provincial land transfer tax. The average price for all Toronto home types combined in September was $960,722, with an estimated land transfer tax payable of $31,379 for the average buyer (over 3 per cent). Real estate commissions are higher in Ontario than in some other provinces, with sellers paying up to five per cent plus sales tax, though commissions are sometimes discounted.
Transaction costs to move in Toronto approaching 10 per cent including legal fees, movers and incidental costs may be a deterrent for a homeowner. Although it may be less costly to move in other parts of the country, the high rates of price appreciation in some cities may be further fuelling a hesitancy among seniors to sell their homes and causing them to stay put.
Another hesitation may be due to the cost per square foot of condos — a potential downsizing option for seniors — compared to houses. A recent Royal LePage report found the median price per square foot in Montreal, Ottawa, Greater Vancouver and Greater Toronto all surpassed that of single family dwellings. In fact, in the Greater Toronto area, the median price per square foot for a condo was about 53 per cent higher. This means without a significant square footage downsize, or a move away from city centres, seniors may not pocket much in net proceeds from a downsize, especially after transaction costs.
Seniors will continue to sell their homes and move to lifestyle communities, and some may require long-term care not available at their homes. In addition, demand for condos and bungalows will also remain high as the population ages. But if most people want to stay in their homes as long as they can — and many will stay put for the rest of their lives — it is important that we are planning for it.
Most financial advisors are paid to manage investments. If seniors are depleting their stocks, bonds, and mutual funds in retirement and do not want to sell their homes to replenish their accounts, that could limit the financial industry’s interest in providing retirement planning advice to them.
Furthermore, retirement planners who simply assume a house will be downsized or sold at some time should be having conversations with their aging clients about the different ways to access home equity if it’s needed.
People who are used to borrowing most of their home’s value during their working years may find that banks are reluctant to lend money to retirees. Foreclosing on a senior who cannot make their debt payments may result in bad press the banks might prefer to avoid.
A reverse mortgage may be an alternative to a traditional mortgage or line of credit for someone over the age of 55. It provides a lump-sum payment to a borrower or pays out some of their home equity over time. Only a couple of companies offer reverse mortgages in Canada. Interest rates are higher than traditional real estate borrowing rates, but seniors who have limited options from banks may be able to borrow up to 55 per cent of their home value depending on their age, location, and type of home.
Reverse mortgage rates may be more like five per cent currently compared to 2 to 3 per cent for mortgages and secured lines of credit. This could mean an extra $2,000 to $3,000 of annual interest per $100,000 borrowed. That may seem like a lot, but the reverse mortgage market in Canada is still developing and may in some cases be the only option to buy extra time for a senior in their home.
A common criticism of reverse mortgages is that they may deplete the estate to be left to beneficiaries. In fairness, selling or downsizing a home and spending some of the proceeds also reduces the estate size. Reverse mortgages may be a tool for a senior who wants to stay in their home and does not have another option.
An alternative to a reverse mortgage for a senior who does not want to move could be to sell a home and then sign a long-term lease agreement for that home. Listing a home for sale with a condition that the seller wants to lease the home from the purchaser may limit the potential buyers. But it could also match up a senior who does not want to move, and needs money, with a potential rental property investor, assuming the proper realtor and legal advice.
Families of aging seniors can try to talk to them about the lifestyle and financial implications of a downsize, but ultimately, the decision is theirs as long as they can make their own decisions — as it should be, of course.
The cost of long-term care in a private residence is significantly more than in a retirement or nursing home. Private caregivers may care for a single person as opposed to many people or need to travel between multiple homes over the course of the day. This is something to consider for retirement planners, policy makers, families, and seniors.
Many homeowners will move in retirement, and given the size of the aging boomer population, this will amount to millions of seniors in the coming years. However, many millions more will not downsize, and that has financial and practical implications for them and everyone else.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.