Study Finds Housing Price Drop Would Affect Young Homeowners

According to a new study, the country's in demand, hot housing market is putting young Canadians at risk. One in 10 homeowners below the age of 40 would be underwater on their mortgages if real estate prices crashed.

The study by Canadian Centre for Policy Alternatives indicates that at least half of those young homeowners who would be affected by a major real estate crash would be in their 20's and 30's, the age group that has gone the deepest in debt to buy a home.

The study's author, economist David Macdonald writes that the country's home prices are overvalued from 10 to 30 per cent.

Canadians in their 30s have the highest debt-to-income ratio which has increased the fastest of any age group. They carry debt worth an average of four times their incomes. According to Macdonald, for every 10-per-cent price drop of a home, young Canadians would see 20 per cent of their net worth wiped out. For every 20-per-cent drop, they would see a 40 per cent loss of their net worth.

For those homeowners in their 40s, 50s and 60s would stand to lose the most money. David Macdonald predicts that they will lose an average of $70,000 to $80,000, as a result of owning more expensive homes. But that would only represent 23 per cent of their net worth, given that older Canadians tend to have more equity and less debt, and have less of their net worth tied up in real estate than younger homeowners.

Governments must prioritize helping Canadians reduce their high levels of household debt if they hope to protect young families from the devastating effects of falling home prices when mortgage rates eventually begin to rise, Mr. Macdonald writes. “We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction,” he says. “There is still time to plan for that tidal wave.”

Reference:

*Study by Canadian Centre for Policy Alternatives

*The Globe and Mail

*http://www.theglobeandmail.com/…/housing-c…/article27169891/