Marc André Castonguay, CFP, CIM
April, 2024
The increasing value of homes has been a reality in some parts of the country for years, and is a fairly new phenomenon in other parts of the country. Here’s how this change might affect your financial plan.
How the increase in your home’s value could affect your financial plan
“Toto, I’ve a feeling we’re not in Kansas anymore.” I was reminded of this famous quote from the movie “The Wizard of Oz” when I looked at my property tax assessment. I’m sure I’m not the only one. The phenomenon of rapidly increasing house values, which has been observed in other parts of the country for many years, is now here in New Brunswick. Based on statistics from the Canadian Real Estate Association, the average price for a single-family home in the province of New Brunswick has increased by 69% from January 2020 to February 2024. How might this impact your financial plan?
Higher net worth
The good news is that an increase in the value of any asset you own, including your house, increases your net worth. Growing your net worth over time is positive, especially prior to retirement. So, from this perspective, a higher property value is a good thing. That being said, it is important to understand how each asset from your net worth will contribute to achieving your financial goals. For example, you may want to help pay for your children’s or grandchildren’s post-secondary education, but selling your principal residence or borrowing against it is likely not the best way to achieve this goal. Contributing to a RESP would be a better alternative. Relying in large part on the value of your principal residence to fund retirement can also have some adverse consequences. Although there are ways to monetize the equity in your home, a “house-rich-cash-poor” approach is not the best solution to reach your retirement goal.
Impact on cash flow
At the heart of a financial plan is the determination of how to allocate your income to the following categories:
Essential expenses and obligations (the “need-to-have”)
Optional expenses (the “nice-to-have”)
Financial goals
As many have observed, a higher home value means higher property taxes. And although the following is not linked to the house’s value, the increase in the cost of utilities and higher mortgage payments if you have recently renewed your mortgage at a higher interest rate have increased your essential expenses. Allocating more resources to the first category results in a decrease in one of the other two categories or both unless your income has sufficiently increased to cover the difference. This means some spending choices must be made. What will be the impact?
Downsizing in retirement
Many retirees consider downsizing at some point in their retirement or selling their home to rent an apartment. If you have evaluated this option a few years ago but did not go ahead with the move, be sure to reevaluate before pulling the trigger. Housing prices and rents have changed so much over a brief period that it is important to redo the math to ensure it still makes sense for you before making this important decision.
What about the kids?
For parents, the principal planning topic for their children tends to be financial support to help cover post-secondary education costs. While this remains an important aspect of their plan, more parents are wondering how their kids will be able to move out on their own and afford a place to live. Some are facing the reality that adult children will live at home for longer, while others want to offer financial support to help their kids move out. Regardless of how parents choose to support their children, it is important that it be included in the financial plan to see how this objective can be fulfilled and understand how it will impact other goals such as retirement, a major purchase or future projects.
It is always recommended to review your financial plan when there are notable changes to your situation. In the last couple of years, circumstances have changed for everybody. Property values have increased dramatically, costs of essential goods are higher, interest rates on loans are up. If you have not done so recently, consider reviewing your financial plan to evaluate the impact of this new reality on your cash flow allocation and gain clarity to help you make choices that will keep you on the path to reaching your goals.
Author:
Marc André Castonguay, CFP®, CIM® is Director of Financial Planning with Louisbourg Investments. Comments or questions may be submitted to him at marcandre.castonguay@louisbourg.net.
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This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.
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