Canadians are getting richer, thanks to their houses
Bank of Montreal found among its high net worth clients that primary residences were worth almost $1.5 million on average. Those clients were defined as having more than $1 million in investible assets.
On top of that, the survey found 36 per cent of those people own at least one second property worth on average $708,539. The bank says many of those people are tapping into equity in their primary residence to fund those additional property purchases.
BMO didn’t calculate real estate wealth as a percentage of overall wealth, but the bank’s deputy chief economist Doug Porter says property isn’t just making the rich richer – all of us are becoming wealthier.
“Real estate has just been one of the fastest-growing assets,” said Porter, adding land and residential structures now account for about 39 per cent of total Canadian assets. “It’s above average [historically] but I don’t think it’s wildly out of balance.”
That percentage has been stable over the last five years but the economist notes that at one point – at the peak of the technology boom in 2000 – it was as low as 31 per cent.
Those percentages are likely even higher in some pockets of the country, such as British Columbia, where the average principal residence was $3.9 million for the high net worth crowd. Those people carry $236,100 in debt, according to the survey.
Do Canadians own too much property?
Most wealthy Canadians surveyed are free and clear of their mortgage and even among those with debt, the average amount they have outstanding is $176,000.
On the second property front, 80 per cent of respondents who have one, say it is in Canada. Another 27 per cent have property in U.S., 11 per cent in Europe, eight per cent in Central America, South America or the Caribbean, seven per cent in either Mexico or Asia and five per cent in Australia.
Vacation purposes were cited by 47 per cent of respondents with second properties as the number one reason for owning. The second reason for owning was for investment purposes at 39 per cent, followed by income-generating property at 36 per cent.
John Turner, director of program and product development for Canada and Asia for BMO Private Banking, said the issue of too much home ownership depends on the type of real estate Canadians are invested in. Income and investment property should be considered separately from primary residence.
He cautions the larger issue is managing the cash flow. “For those folks overweight in real estate, you can run into a situation where they have a cash flow situation because they are leveraged and can’t afford [payments].”
“You could leverage your property and invest the money,” said Turner.
But diversifying is easier said than done, when it comes to a primary residence. Most people simply do not want to move to limit their exposure to a downturn and that’s not even considering the substantial fees associated with moving.
Elton Ash, regional executive vice-president of Re/Max of Western Canada, said the survey is nothing new to him, especially when it comes to Vancouver.
“I’ll give a scenario. You get an 82-year-old widow in her home for 45 years. The problem for some of these people is that they can’t even pay the property taxes,” said Ash. “It’s not just high net worth people in this boat [with valuable real estate]. It’s just a huge segment of the baby-boomer demographic who have a ton of equity in their home.”
Toronto certified financial Planner Ted Rechtshaffen, chief executive of TriDelta Financial, said clients are often reluctant to tap into home equity to invest, but says that when 50 per cent of your wealth is in your house it’s time to ask questions.
“There are people who say paying down your mortgage is the ultimate financial move you can make, but I try to tell those people to stop paying more to their mortgage if a majority of their net worth is in real estate,” said Rechtshaffen. “If it makes sense, maximize your RRSP, your TFSA and RESP first. And when you are investing, try to stay away from real estate.”
The last thing he would do is double down on real estate by buying a cottage with equity from your primary residence.
Source: Garry Marr, Financial Post