Residential real estate plays a pivotal role in the wealth portfolio of Canadian households, now accounting for an estimated 41% of their total assets as reported by Statistics Canada. As many homeowners approach retirement age, they anticipate that the appreciation of their properties will form a critical part of their financial strategy. However, recent trends in the housing market suggest that this assumption may require a more cautious approach, especially for those contemplating downsizing as a means to bolster retirement funding.
Throughout the past year, Canadian housing prices have faced significant downward pressure. Recent data from the Canadian Real Estate Association reveals a decline of 3.6% in the composite home price across the country from April 2024 to April 2025. Although certain regions, particularly in Quebec and the Maritimes, have recorded gains in excess of 10%, the broader landscape indicates a troubling trend, particularly in Ontario, where declines have been prevalent. The Greater Toronto Area, a barometer for the national market, has seen benchmark prices plummet by 21.3% since their peak in February 2022.
For retirees or those nearing retirement, these declines pose serious risks to financial plans that hinge on real estate values. Analysts from reputable organizations such as the Organization for Economic Co-operation and Development (OECD), as well as credit rating agencies and bank economists, are projecting potential job losses and stagnant economic growth leading into 2025. Some indicators suggest that Canada may already be in the early phases of a recession characterized by two consecutive quarters of economic contraction, although definitive recognition of this will only emerge in subsequent months.
Homeowners with the expectation of an imminent recovery in property values should tread carefully. The current economic environment presents numerous challenges, not least of which is the rising cost of homeownership relative to income levels. As mortgage rates have climbed, many homeowners are adjusting to new financial realities, with about to mature fixed-rate mortgages that were previously secured at under 2% expected to renew at significantly higher rates.
The nature of real estate investing sets it apart from traditional financial instruments such as stocks or bonds. Retirees who rely on investment portfolios might experience a “sequence of returns” risk, which depicts the adverse impact that poor market performance in the initial years of retirement can have on long-term financial viability. Conversely, selling real estate is a single transactional event, akin to liquidating an entire investment portfolio in one day rather than systematically drawing on it over many years. Hence, those depending on an anticipated sale for a substantial retirement fund should reassess their expectations realistically, particularly if they are counting on property values returning to the peaks observed in 2022.
The costs associated with moving—often underestimated—can deeply impact the net gains realized from downsizing. Real estate commissions typically range from 3% to 6% of the sale price depending on various factors including location and home value, while additional costs such as land transfer taxes can run anywhere from 1% to 3%. Homeowners may also incur unanticipated expenses from hiring moving services to settling into a different community, and these costs can cumulatively add up to a significant portion of the sale price. For those downsizing to a less expensive home, it is not uncommon for these transaction costs to erase any anticipated cushion for retirement savings.
As homeowners grapple with the complexities of downsizing, how they choose to invest any proceeds becomes critical. During this phase, a heightened concern surrounding investment losses often arises as individuals transition from the accumulation to the decumulation of assets. Many find their risk appetite has diminished, necessitating a reevaluation of retirement strategies built on past market performances. With Canadian and U.S. markets delivering strong returns in recent years—evidenced by the S&P/TSX composite index recording a 9% annualized return over the previous decade—retirees may need to temper expectations moving forward, particularly in light of potential economic headwinds.
The emotional toll of downsizing cannot be overlooked, as many individuals face the daunting task of parting with long-held possessions and altering significant aspects of daily life, such as gardening or hosting gatherings. This psychological burden can deter some homeowners from selling, causing considerable anxiety and ultimately stalling important decisions regarding their living arrangements. As mobility begins to decline with age, further complicating the decision to relocate, many find themselves in homes that may not be conducive to a safe and comfortable living environment as they grow older.
For U.S. citizens residing in Canada, the potential ramifications of real estate sales extend beyond the financial. Although Canadian homeowners generally benefit from the principal residence exemption, which shields them from capital gains taxes upon selling their homes, American expatriates could encounter unexpected tax obligations. U.S. tax law requires citizens to pay taxes on their global income and the foreign tax credits available may not prevent unexpected liabilities. Given the appreciation of Canadian property values compared to the U.S. market, along with the nuances surrounding home sale exclusions, long-term American residents need to be particularly diligent in their tax preparations.
As with all financial planning endeavors, proactive strategizing becomes essential for individuals contemplating downsizing as part of their retirement plan. Engaging with financial advisors early in the process can illuminate potential risks and avoid unforeseen complications. Jason Heath, a certified financial planner with Objective Financial Partners in Toronto, emphasizes the importance of navigating these waters with foresight. Creating contingency plans that consider shifting market dynamics, investment strategies, and personal circumstances can empower homeowners as they make critical decisions in these transformative years.
In sum, the path to successful retirement funding through real estate is fraught with complexities current dynamics necessitate a more cautious and informed approach. With shifting economic conditions and a volatile housing market, homeowners would do well to re-evaluate their strategies, focusing not only on financial metrics but also on the personal and emotional dimensions of moving. Achieving a balanced perspective, informed by both market realities and individual priorities, can lead to a more resilient financial future.
In this evolving financial landscape, readers are encouraged to reflect on the implications of these developments and share their insights within the community. Engaging in conversations around such pivotal issues can empower individuals to make more informed decisions about their financial futures. Here at CashNews.co, we strive to deliver timely and insightful analysis, ensuring that you are kept abreast of the latest developments in the financial sphere.