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How A Housing Market Decline Could Put Canadian Retirement Savings At Risk

An article from the Globe and Mail by Tara Perkins

A housing market decline would put the retirement plans of many Canadians in peril, the CEO of Sun Life Financial is warning.

Baby boomers are too fond of debt and they haven’t experienced a period of rising interest rates before, Dean Connor says. Some of them think they’ve been smart in the housing market when really they’ve been lucky, he added in an interview Tuesday.

His advice to Canadians, especially those approaching retirement, is to pay down debt now and, if they have a mortgage, to lengthen the guaranteed interest term on it. The goal should be to be debt-free by retirement, Mr. Connor says. He will be making this point during a keynote address Wednesday evening at a pension reform summit in Toronto.

While Mr. Connor says he is not predicting a crash in home prices – in fact, he’s not sure what will happen in the Canadian housing market – he is certain that, at some point, interest rates will go up. And, all things being equal, higher interest rates usually drive real estate values down, he says. That frightens him because consumer debt levels are high and more than half of Canadians’ assets are tied up in real estate.

“The most vulnerable – i.e., the 1 million Canadians whose current debt servicing costs are 40 per cent or more of disposable income – may have to sell their real estate, crystallizing losses and setting back their retirement plans,” Mr. Connor says in notes for his speech. Others will find that it’s harder to save for retirement once mortgage rates rise.

Mr. Connor cites some statistics. Consumer debt in Canada has risen from 87 per cent of disposable income in 1990 to 164 per cent today, making it the highest among G7 countries. More than 70 per cent of people age 55 to 64 held some form of debt in 2012, up from 61 per cent in 1999. Forty-three per cent of households led by Canadians age 65 and above held debt in 2012, up from 27 per cent in 1999. And the fastest growing segment for personal bankruptcies is among near-seniors and seniors, he says.

“The parents of baby boomers – my parents – grew up in the Great Depression,” he says in his speaking notes. “They hated debt and did everything they could to pay it off. In contrast, baby boomers like debt, and it’s easy to see why. We’ve had over 30 years of declining interest rates and increasing real estate values – what a great combination!”

The average Canadian debtor age 50 to 64 owes a little over $100,000, Mr. Connor says. “If interest rates go up by 200 basis points, and your mortgage payment jumps by $120 per month, it will crowd out retirement saving and/or current consumption. It’s one thing if you’re in your thirties and you have time to recover. It’s another thing if you’re in your sixties.”

A recent Sun Life survey found that 24 per cent of Canadians said they plan to use their home as their primary source of retirement income.