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Photo: Taber Andrew Bain

A Canadian think tank is calling on governments to address rising household debt in a report that says a housing market correction would impact young families the most.

The Canadian Centre for Policy Alternative’s new report The Young and the Leveraged, released Monday, looked at what a 20 per cent drop in real estate prices would mean for Canada’s young families, and the prognosis was not good.

“If, or more likely when, real estate prices fall, families in their 20s and 30s can expect to lose a substantial portion of their net worth and could find themselves owing more than their house and other assets are worth,” said David Macdonald, CCPA’s senior economist and the report’s author, in a statement.

The report’s findings suggest that those under 40 would be disproportionately affected. One in 10 families in this age bracket, which works out to 169,000 families, would be left with debt exceeding the value of their assets.

“The most at-risk families are those who are heavily leveraged, with all their wealth in their house, and who arrived late to the real estate party,” the report said.

CCPA noted that the most leveraged demographic were thirtysomethings. This demographic’s debt-to-income ratio surpasses that of all other age groups and is almost double what it was in 1999, now sitting at four to one. “Canadian families are taking on disconcerting levels of debt to finance their real estate dreams,” the report said.

A significant downturn would actually end up burning a bigger hole in the wallets of families in their 40s, 50s and 60s. On average, these groups would lose upwards of $70,000 in net worth, roughly double what twentysomethings would experience, but “focusing on dollar-amount misses the full picture,” the report explained.

“As a rule of thumb, young families lose 20 per cent of their net worth for every 10 per cent decline in real estate values.”

That’s because middle-aged homeowners have generally accumulated greater assets, made a bigger dent in their mortgages or own outright, and have had the chance to profit off of rising real estate prices over a longer period.

For these reasons, said the CCPA, net-worth percentage declines are the figures to watch so far as evaluating the financial impact on families. A 20 per cent drop in home prices would reduce the net worth of families in their 20s by an average of 45 per cent, or $40,000. Families in their 30s wouldn’t fare much better, at least per cent wise; their net worths would be reduced by 39 per cent, or $60,000, on average.

“As a rule of thumb, young families lose 20 per cent of their net worth for every 10 per cent decline in real estate values,” said Macdonald. By comparison, middle-aged homeowners would experience net-worth losses of 23 per cent or less in the event of a 20 per cent price correction, according to the report.

Where young families live would also play a part in how hard they are hit during a correction, Macdonald noted. “In cities with higher prices, like Toronto, Vancouver and Calgary, young families would likely see declines in net worth dramatically worse than the national average due to higher leverage,” he said.

So what should be done to protect homeowners? In the report, the CCPA advised various levels of government focus on deleveraging the household sector. It suggested looking south of the border to see what can be learned from how the feds handled the American housing market crash of 2008.

One stateside program CCPA pointed to was the Home Affordable Modification Program, which let homeowners at risk of foreclosure modify their mortgages through extended terms, reduced interest rates, or putting off payments altogether. If Canadian interest rates or unemployment rise, a northern iteration of this program could help out.

“We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction,” the report concluded. “There is still time to plan for that tidal wave.”

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