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The love of houses, whether they be single family dwellings, townhouses, condominium apartments or anything in between, has been pretty strong in recent months. Interest rates are low, house prices have been rising and some people, still turned off by the market volatility of the past couple of years, are viewing a home purchase as an alternative to investing in financial assets such as stocks or bonds.

I am often asked the question: Should I invest in my home, pay off my mortgage or should I save and invest for retirement? Let me say right up front that comparing the investment value of a home with the investment value of financial investments is a complicated, tedious and often inconclusive process and I have deliberately left the tax considerations to the tax experts. Regardless, I think it is useful to review some of the key issues.

A house as an investment

Comparing the return on investment from owning a house to various financial investments isn't easy. At first glance, one could simply compare the return over a period of a set amount of money invested in a house compared with various types of financial investments such as equities, bonds, cash and a combination of the three. The problem with doing that is there is so much more to consider.

The house as a place to live

This comparison is easy. You can't live in a mutual fund, a stock or a bond. A house keeps the rain off your head and the cold outside. More significantly, a house provides more than simple shelter. Economists refer to it as "psychic income": a house becomes a home. Relationships develop and evolve, children are raised, and the local community becomes part of your social fabric and your life. It is true that you don't need to own a home to obtain these benefits. However, the likelihood of obtaining these benefits as a renter may be somewhat less than as an owner. Factual evidence is hard to pin down on this point, but it may be that renters tend to stay in their rental accommodation for shorter periods of time than owners and it may be that owning simply engenders a different attitude than renting.

That is the good news. But, as the next section discusses, the 'psychic income' that we can receive from owning a home also puts some severe limitations on a house as a generator of retirement income, mainly because the attachment that many home owners feel toward their homes and neighbourhoods makes them reluctant to sell.

The house as a generator of retirement income

Houses don't do terribly well as generators of retirement income. You can sell part of your investment portfolio, but not part of your home. It is true you can rent out some of your house, but that will depend on the type of dwelling and how you feel about being a landlord. You can also borrow against the value of your house, either through a reverse mortgage or a bank line of credit. Doing that does solve the potential problem of a reluctance to leave the family homestead, but it does so at the cost of running up a bill for interest on the loan. It can hardly be otherwise, since the lenders involved in these programs must get paid.

That leaves the choice of selling the house and purchasing a less-expensive residence or investing the proceeds and renting accommodation. Notice that I used the term "less-expensive". The traditional term was "down-sizing". The problem is down-sizing the physical size of where you live doesn't necessarily mean down-sizing the price, although it certainly is possible to do so. And, it may mean moving out of a neighbourhood to which you have become strongly attached.

We have already discussed home maintenance costs. If you have purchased - and paid for - a house and have made the decision to remain there in your retirement, you will most certainly have maintenance costs. In fact these could be larger than when you were working since the house will be that much older by the time you retire.

Finally, an interesting side note to this discussion comes from the people concerned with defining adequate income coverage in retirement. On more than one occasion, I have heard the opinion expressed that if someone is a homeowner, her need to accumulate financial assets can be adjusted down accordingly. In other words, once an individual's savings are exhausted, she can simply sell her house and fund her retirement with the proceeds. Those who hold this opinion clearly do not give any credence what so ever to the 'psychic income' component of home ownership.

The verdict: by all means own a home, but also save for retirement. This is just about as middle of the road a conclusion as there is. But, often, middle of the road approaches are the ones that prove most effective. Saving for retirement and paying for a home should be viewed as complementary activities - each serving to support the other (Home Buyers' Plans and a home equity loan for emergencies come to mind). Developing a tailored plan for optimizing both choices should help your clients wind up with the best possible solution.

Peter Drake, Advisor.ca

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