It is a Canadian tradition, long encouraged by the government, to increase retirement savings to make a down payment on a first home. But for young Canadians who have bought homes at premium prices, the strategy looks like a disaster.
According to the Canadian Real Estate Association, the average sales price of a home peaked at $816,720 in March 2022. That number fell to $673,335 by the end of last year, a decline of more than 17 percent. In comparison, the S&P/TSX Composite Index rose about 50 percent during this period.
It’s a remarkable reversal of fortune that makes the Home Buyers’ Plan, which allows you to withdraw up to $60,000 from your RRSP and repay it over a period of up to 15 years, seem like a terrible bet.
Before you judge those who have taken advantage of the HBP, remember that it was advocated by policymakers and supported by the real estate industry, which fought hard and successfully to increase the amount available for disbursement as property prices rose.
Over the years, the HBP limit has increased from $15,000 to the current $60,000. And it’s per person, so double it for a first-time couple.
But here’s the other thing. In fact, it worked for the longest time when Canadians secured homes that also served as leveraged investments; The returns were astronomical and tax-free because they fell under the primary residence exemption. Simply a great offer.
Mortgage broker Shawn Stillman and his wife withdrew $15,000 each from their RRSPs in 2017 and paid off the loans over four years, a great move since the price of their home rose by two-thirds in six years. This is a tax-free jackpot.
Stillman said an RRSP withdrawal can be useful when dealing with clients when their money is in cash and isn’t earning much. He also said when interest rates on a five-year mortgage were below two percent in 2021, an RRSP withdrawal made little sense.
“You could have left the money in your RRSP and probably had better growth,” he said.
Carl Gomez, chief economist and executive vice president of Centurion Asset Management, said the Home Buyers’ Plan allows people to put down a down payment on a home, but at the peak of the market those withdrawals look ugly.
“It’s terrible. You take your wealth that’s grown and invest it in something that’s going down,” Gomez said. “The whole point of this is to borrow from your future an asset that will grow at a tax-free preferential rate. But it really comes down to the hope that this strategy will help you build your equity faster.”
For the people who borrowed at the highest market levels, they have suffered losses on their home and retirement plans.
“It’s expanding. For a long time it was said that buying a house was the best financial move,” Gomez said. “You basically put all your eggs in one basket and don’t diversify your resources. That’s the biggest problem. And that’s the biggest problem Canadians have ever had: They haven’t diversified their asset base.”
He said the other problem he’s always had with transferring his retirement savings home and making it his nest egg is that it’s all paper. “You just can’t liquidate your house,” he said. “In the U.S., they have far more equity in things other than their house.”
Phil Soper, chief executive of Royal LePage, one of the country’s largest real estate brokerages, said the payout limit needed to be increased because home prices were rising so quickly.
The executive said ideally Canadians would max out their tax-free savings accounts and RRSPs and use unregistered money for a down payment.
“This works if you’re a financial planning superstar, but for a lot of young people it’s too much. It’s mathematically impossible to fill all three areas. There aren’t a lot of people using it, and it’s only about 100,000 or 150,000 people, which isn’t much compared to the number of people who have RRSPs,” Soper said.
LePage’s data shows that younger generations still want to own property, but it is out of reach due to cost. Soper doesn’t think young Canadians caught in this negative delta of losing money on their home as the market rises will significantly change their buying strategy.
“Only a small percentage fell into this relatively small 18-month window of irrational housing prices,” Soper said.
The strategy that should change for young Canadians is to take advantage of the First Home Savings Account, which will be introduced in the 2022 budget.
Jennifer Hughes, a certified financial planner at Modern Cents who doesn’t sell products or make specific investment recommendations, said it’s unfair to criticize people who use the HBP program because you can’t time the market.
Hughes said that today, if you’re planning on buying a home, you really need to look at the FHSA and be very specific about when you open the account.
You can deduct up to $8,000 in contributions annually from your taxable income, with a lifetime contribution limit of $40,000. The catch is that the space doesn’t accumulate until you open the account – meaning if you’re thinking about buying, you should open the account now.
A key advantage of an FHSA is that once you withdraw the money, it is treated like a TFSA and is not taxed as long as it is used for a home. Even if you never buy a home, the money can be transferred to your RRSP if you have the contribution room.
But timing is everything. You can’t just contribute $40,000 to your FHSA weeks before you buy your home. You can go back a calendar year, but that will only net you $16,000. It’s important to maximize that FHSA for a few years before you plan on pulling the trigger.
“If you’re planning on buying a home, there’s really no downside to contributing to your FHSA,” Hughes said. “By opening an account, you get an additional retirement room for free.”
While borrowing from retirement has likely angered some young Canadians, it shouldn’t mean the end of the practice. But the lesson today should be to use the FHSA first unless your employer matches RRSP contributions.
As home prices fall, $80,000 in FHSA savings is closer to a 20 percent down payment than it has been in years.
• Email: gmarr@postmedia.com