Dale Jackson

Personal Finance Columnist, Payback Time

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It’s no surprise that home ownership plays an outsized role in Canadian retirement savings, but a new report from RBC breaks down how our homes are playing a growing role as a vehicle for overall portfolio growth.

It finds nearly half of the Canadian wealth accumulation has been driven by home ownership over the past three decades. Since 2010, as home equity grew, the average homeowner saw their net worth grow from nine times household disposable income to 13 times. 

Over the same period, the net worth for renters grew from three times household disposable income to only 3.5 times.

To further illustrate the growing wealth gap between homeowners and renters, the report shows the portion of income homeowners allocated to housing fell to 21 per cent in 2022 from 23 per cent in 1999.

In comparison, the portion of income renters allocated to housing rose to 29 per cent in 2022 from 25 per cent in 1999, even though incomes rose at the same pace.

How a house is, and isn’t, like any other investment

Many Canadians rely on their homes for retirement. On one hand, a home is like no other investment because it is literally the roof over your head. If the stock market goes bust you still have a place to go at the end of the day.

But if you set aside the emotional aspect of hearth and home it is like other investments because it can be expected to hold, and grow its value over time. 

According to the Canada Mortgage and Housing Corporation (CMHC), the average annual increase in property values over 20 and 30-year periods has always exceeded five per cent since the end of the Second World War. 

That’s in line with much more volatile stock markets for Canadians who invest for retirement through company pension plans and Registered Retirement Savings Plans (RRSP).

Taking the analogy one step further; being able to live in a home instead of paying rent is much like a dividend, which has grown increasingly rich as rent prices skyrocket. Homeowners can also generate income by renting out part of their homes.

One of the biggest investment advantages to owning a home is a tax exemption on any gain from the sale of a principal residence. Half of any gain on any other equity investment in a non-registered trading account is taxed, and if it is in an RRSP it is fully taxed when it is withdrawn.

The tax treatment on the sale of a principal residence is more like a Tax-Free Savings Account (TFSA), where gains are never taxed. A good tax-saving strategy in retirement involves withdrawing fully taxable income from an RRSP, company pension, Canada Pension Plan (CPP) or Old Age Security (OAS) at a low marginal rate and topping it up with tax-free money from a TFSA or home equity.

Home equity can help provide tax-free retirement income through a home equity line of credit (HELOC), a reverse mortgage, or downsizing to a smaller home.  

How a home fits into a broader investment portfolio

A home is the single largest investment for most Canadians, but it shouldn’t be the only one.

How much of a role a home should play in a retirement plan depends on the individual property and the needs of the individual retiree, but if you want to measure it against some of the other holdings in a retirement portfolio there is one important thing to consider:  

While risk in a portfolio of stocks can be diversified across sectors, geographic lines and asset classes, your home carries the concentrated risk of one sector (real estate), one sub-sector (residential) and one geographic area (your neighbourhood). 

Data on home values are based on averages and not all homes appreciate at the same rate; or appreciate at all.

A balanced, diversified, investment portfolio that includes a home is key to a secure retirement.