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Who is the most Vulnerable if Housing Prices drop?
According to the Centre for Policy Alternatives, Canadian homeowners under 40 will take a major financial hit if real estate prices come crashing down. The report the Centre released in November of 2015 suggests that if real estate prices crash as expected in the near future, 1 in 10 homeowners under 40 will be underwater on their mortgage, meaning their debts will be greater than their assets.
Right now the Bank of Canada estimates that the real estate market is overvalued from 10-30%. Analysts say that eventually the market will correct itself and prices will go down, either due to rising interest rates, declining incomes, or both. The study from Centre for Policy Alternatives however, says when that happens, homeowners under 40 will be disproportionately affected because they are debt-strapped and will see a bigger drop in overall net worth. Canadians in their 30's carry debt worth an average of four times their incomes.
The bigger issue to consider here is the possibility that interest rates on mortgages will rise, triggering the anticipated drop in housing prices. Some families in their 30’s could lose an average of $60,000 if there is a correction of 20 per cent and people in their twenties could see their net worth reduced by 45 per cent in the same situation. And while many young homeowners can withstand a housing market crash by staying put and waiting it out, not everyone can afford to pay a bigger monthly mortgage. If you can't afford to keep your house because you can't afford the extra $350-$400 a month in mortgage payments, now you've got a really serious problem.
We have a situation in which more young people and young families, spend more on their housing as opposed to anything else. So they don't go to restaurants or don't take vacations, they don't spend; they literally stay home and finance their huge mortgages. This slows down the entire economy which in turn makes things even worse because unemployment starts to rise, and eventually... some people actually won't be able to pay at all.
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