Bank of Montreal : A Lesson From Spain: BMO Chief Economist Dr. Sherry Cooper Cautions Canadians on Over-Investing in Real Estate
- Sorting through the wreckage of Spain's housing collapse reveals important lessons for Canada's housing market
- BMO advises Canadians of the importance of retiring mortgage free
TORONTO, ONTARIO--(Marketwire - April 30, 2012) - According to Dr. Sherry Cooper, Chief Economist, BMO Financial Group, Canadians can learn a painful lesson from Spain in over-investing in the housing market and putting their retirement in jeopardy.
"Housing is a key sector in any economy and many developed countries pride themselves on a high level of homeownership, but as we have painfully seen in recent years, over-investment in housing can result in enormous economic instability and dislocation," said Dr. Cooper.
For nearly a decade starting in 1999, house prices exploded in Spain as both domestic buyers and, more notably, foreign buyers poured money into Spanish residential real estate. The return on investments in residential real estate significantly outpaced the return on any other asset class, so large numbers of Spaniards bought second and third homes expecting to rent and flip them for astonishing gains.
"The entire growth boom in Spain was focussed on housing and households invested almost all of their assets in residential real estate," said Dr. Cooper. "At its peak in 2008, nearly 80 per cent of Spanish household assets were in housing. In comparison, the level in Canada at the end of 2011 was 39 per cent - close to a record high."
As the U.S. housing market is bottoming, Spain's housing collapse likely has much further to go. In Spain, house prices have already fallen 21 per cent from their peak in Q1 2008 and could ultimately be down more than 55 per cent. This compares to the total decline in U.S. house prices of just under 35 per cent.
"As we've seen in other parts of the world, too much reliance on housing appreciation for wealth accumulation and retirement security is very dangerous," noted Dr. Cooper. "Retirement savings in Spain have been obliterated, and nest eggs in the U.S. have shrunk considerably."
Dr. Cooper added that too much household debt is also very dangerous, as it increases vulnerability to interest rate risk and to economic risk of income losses or job losses. And, while Canada is in much better shape than many countries, Canadians have taken on far more risk than ever before, "As more and more of us depend on RRSPs rather than traditional pensions and will need to rely, as well, on home equity to assure financial security, we are more vulnerable than ever to market swings and economic risk."
In a recent report by the BMO Retirement Institute, among Canadians aged 50 to 59, more than three-quarters own their own home and almost half carry a mortgage. Further, for those aged 60 to 69, 75 per cent own their homes and more than a quarter still have a mortgage.
"Failing to pay off your mortgage before retirement means you could be carrying significant debt into retirement, which could be a threat to your financial security," said Tina Di Vito, Head, BMO Retirement Institute. "Many retirees have fixed incomes and could find it very difficult to meet their mortgage obligations, especially in the event of sudden increases in interest rates or unexpected expenses."
A full copy of the report is available at www.bmocm.com/economics.
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