If houses are investments, then buying is only half the battle.
You also need to think about selling, a topic that will generate a lot of conversations this year among baby boomers who have piled up equity in recent decades and are wondering how much downside there is to house prices.
Here’s a plan adventurous boomers have to be thinking about: You sell close to the peak of the market, find a place to rent and then watch the market. Later, at your leisure, you assess whether to buy back in at an attractive price or continue to live the renter’s life.
There’s obvious appeal here in that selling now would lock in a huge profit if you bought decades ago. But there are also financial and lifestyle risks to consider and, right now, they outweigh the benefits of the sell-and-rent strategy. Avoid it unless you have deep financial resources and are fine with uncertainty about where you live.
Housing math does make a great case for selling and renting. The national average resale house price pretty much quadrupled over the past 20 years, numbers from the Canadian Real Estate Association show. Average prices in 2001 and 2021 were $172,122 and $687,990, respectively.
Sell now, deduct a real estate commission and closing costs from that 2021 national average resale price and let’s say you end up with $645,000. Invest your net proceeds in dividend stocks with an average yield of 4 per cent and you end up with $25,800, or $2,150 a month. That’s money you can use to subsidize your rent while you wait for house prices to decline.
Remember taxes, though. Even with the dividend tax credit, someone with income of $150,000 would pay a marginal tax rate of roughly 20 per cent to 30 per cent on eligible dividends, or those paid by corporations. In a non-registered account, maybe you’re getting $20,000 in dividends after tax, or $1,666 a month.
Rentals.ca’s April Rent Report shows an average monthly cost of $1,889 for two-bedroom rentals across the country. Vancouver and Toronto took the top two spots on cost at $3,122 and $2,776 on average, respectively.
Will an average rental suffice for the kind of person who sells a house to survey the market for possible re-entry at a lower price? Likely not. So figure on a rough average of $3,000 to $4,000 and up for something suitable. Subtract your after-tax dividends and you’re looking at coming up with $1,300 to $2,300 or so in monthly rental costs.
The housing market in early May is losing momentum for sure, and prices in Toronto did slip mildly from March to April. But we won’t really know whether house prices will fall significantly until the effects of rising rates start accumulating later this year.
Biding your time if you sell your home presents a risk for the invested proceeds from the sale of your home, which is presumably money you’d use to buy back into the market after prices fall.
If the stock market continues its recent weakness, your dividend stocks could fall sharply in value. A loss of 20 per cent or more could happen in a couple of bad weeks. Your dividends shouldn’t be affected by this, but you would temporarily lose purchasing power on a next home.
Guaranteed investment certificates offer 4-per-cent returns, with zero risk of losing money if you work within deposit insurance limits. But you have to lock in for at least three years to get that rate, and your after-tax return will be lower than with dividends in non-registered accounts.
The greatness of renting is that you have one fixed cost a month, with no exposure to the unpredictable and inevitable costs of keeping a home in good working order. But renters have risks of their own.
Maybe your landlord decides to do just like you and sell to lock in a profit at what could be a market peak. Now, you’re looking for a new place after just getting comfortable where you are. Or, maybe your landlord needs to jack up the rent to cover rising mortgage costs.
Of course, there’s also the risk that housing prices don’t fall enough to make much of a difference, or they end up rising again in a few months. If it turns out renting isn’t for you, then now you’re plotting ways to buy back into the housing market without damaging your finances.
Selling the family home now, renting and buying back in later has the potential to make you a financial legend in your own time if all goes your way. But there’s so much uncertainty to deal with while you wait. Why put yourself through that?
PERSONAL FINANCE COLUMNIST
The Globe and Mail, May 9, 2022