There are millions of empty nesters in Canada, and their numbers keep growing. But a key question remains: When, if ever, will those long-time homeowners downsize?
Today, the main impediments to
baby boomers
downsizing are a lack of products that appeal to them, a financial system that rewards ownership with better tax breaks and age-old prejudices that keep them out of what is a growing
rental market.
Adrian Rocco, the founder and chief executive of Fitzrovia, is challenging that narrative by targeting this very group, and his company now has $11 billion in assets under management, focusing specifically on segments of the Canadian market that were traditionally owners.
That approach includes building larger units and amenities that target young families, but the fertile ground of downsizing Canadians is also clearly on his radar.
“We’ve made a big call on downsizers and young families,” said Rocco, whose rental communities target both groups in specific buildings. “One of the fastest cohorts today is older Canadians. In Toronto alone, households aged 55-74 have grown by 65 per cent over the last 20 years. And people are living longer and have home equity but increasingly choosing rental over home ownership.”
The interest comes at a time when the rental market has softened. Average February asking rents nationally were $2,030 per month, a 2.8 per cent year-over-year decline and a 33-month low, according to Rentals.ca, but still high compared to historical levels.
Rentals.ca has still only seen a two per cent jump in the past year in the proportion of prospective renters in the 55-64 category. That percentage is down 14 per cent for those 65 and older. Giacomo Ladas of Rentals.ca said that could just be the lack of suitable inventory.
Rocco said that product is now coming to market, and that aging empty nester with a $2 million home in Toronto, is his target customer.
“The biggest barrier to downsizing has always been product, historically,” he said.
His buildings offer larger suites with amenities such as commercial-grade gyms, rooftop pools and co-working spaces.
“Health and wellness are just too important, so we have cold plunges, saunas and spas,” he said. “But we have to have amenities for even grandkids to play in.”
What he is trying to sell is a form of resort-style living, but the price is sure to set off a debate.
The luxury end can cost close to $5 per square foot, with a 745-square-foot two-bedroom unit now renting for $3,300 per month in one of his buildings.
This is when your realtor, in trying to convince you to downsize, will tell you that you are “throwing away money on rent” by paying $40,000 for an apartment.
I reject that argument, and so does Rocco.
“It’s 30 per cent more expensive to have a home,” he said, not even factoring in the equity tied up in ownership.
I would also include the lost opportunity cost of a $2 million paid-off home in a market where prices are pretty flat. It’s not hard to generate a $100,000 return of five per cent on that equity, though there is a major caveat: your investment would no longer be tax-sheltered because of the principal residence exemption.
While the options are growing for those willing to consider
luxury rentals
, it’s not a large segment. The same goes for empty nesters downsizing into smaller homes.
Jason Mercer, chief information officer at the
Toronto Regional Real Estate Board
, said the typical example in the city is one or two people living in a family home after children move out.
“They’d like to stay in the same area, but there’s nothing that fits the bill. In a lot of cases, it gets back to that lack of missing-middle housing,” he said. “The propensity to own is still quite high, certainly in the GTA. If we did see people moving out of larger homes and into rental, that might also open up opportunities in the ownership market for people that are moving up as well.”
Another option might be for people to move to smaller homes in their neighbourhoods, such as bungalows. The problem is that those dwellings are increasingly being swallowed up by larger projects or infill housing.
Mike Moffatt, founding director of the Missing Middle Initiative, said the deck remains stacked in favour of home ownership because of the principal residence exemption, which protects the investment from tax.
“You put that money somewhere (after selling), and any gains will be paying the
capital gains
rate,” said Moffatt. “Your $2 million home will keep appreciating and in a capital gains-free way. The tax system is structured to keep people in place.”
You can add all the costs associated with moving, including land transfer taxes, which are applied at the city and provincial levels in Toronto. If anything, Canada’s largest city may be encouraging people to stay even longer in their homes by adding a so-called luxury land transfer tax for houses that sell for more than $3 million in Toronto.
Moffatt points to Australia, which allows people over 55 who have lived in their home for more than 10 years to take their gains and put them into an equivalent of a
tax-free savings account.
Where do I sign up for that?
“Downsizing (or selling) just makes less financial sense than people think because of the tax implications,” said Moffatt. “If we could get land transfer taxes down, it would help and some type of vehicle (to protect profits from a sale).”
At the end of the day, home ownership is something that Canadians have long been attached to and won’t give up easily. Not having a product that meets their needs just further reduces the chances they’ll make the move.
Luxury rental will probably move the needle, and as Rocco said, institutional owners like Fitzrovia have removed some of the risks to security of tenure by offering longer lease terms, if desired by tennants.
“You can create housing that people want to live in, and that will make a difference,” said Moffatt.
But we are going to have to eliminate or reduce the tax consequences to get empty-nesters to change and create even more targeted housing if we want to convince aging demographic groups to downsize.
• Email: gmarr@postmedia.com