“Obviously you want to advise clients to not get in over their heads; they should build a three-month savings cushion,” Doug Whelpton, a broker with Verico
Worry Free Mortgage, told MortgageBrokerNews.ca. “Using pre-payment tools can help as well; some lenders allow some wiggle room for clients who prepay and may miss a payment.”
Qualifying for a smaller mortgage is another way young Canadians can manage any sort of price shock, according to Whelpton.
According to a report from the left-leaning think tank the Canadian Centre for Policy Alternatives, one in 10 young homeowners would be left with an underwater mortgage in the event of a 20% housing correction.
"Declines in real estate prices would have a strongly disproportional impact on young homeowners," CCPA economist David Macdonald said in the report. "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."
According to the study, Canadians would lose just shy of $40,000 each on average, which would reduce their net worth by 45 per cent.
Many industry players may scoff at the idea of a 20% drop in housing prices, however. Especially considering the year-over-year gains many of the major markets have enjoyed in recent years.
Still, the Bank of Canada has estimated home prices are overvalued 10-30%.
"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," Macdonald said. "A badly managed downturn in real estate prices could wipe out the wealth of a large number of Gen-Xers and Gen-Yers … we need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction."
Young Canadians are most at risk in the event of a housing market correction, according to a recent report. But brokers can help them prep for what many fear is the inevitable.