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Toronto. Calgary. Vancouver. They're all Desperation City as far as young people trying to afford a house are concerned.

The theme in housing market forecasts for 2015 so far is steady pricing. Some markets will more or less be flat, while the Big Three markets could rise 3 to 4 per cent. What more could go wrong if you're struggling to save enough money to buy a first home? Here's something: You buy and then have to deal with a shock to the economy. Something like a plunge in oil prices that undermines growth and hurts the job market, for example.

In a column earlier this week, I argued that anyone buying a house today should plan to live in it for a decade to ride through any price decline that could happen in the years ahead . Now for some advice specifically aimed at young buyers who despair of price declines ever happening and wonder if they should buy now, before affordability deteriorates further. If affording a house is at all a stretch for you financially, step back from the housing market and keep saving. Let's talk again in a year.

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Some insight on the financial situation of young homeowners was contained in the much-publicized Bank of Canada report estimating that house prices may be as much as 30 per cent overvalued. First off, the bank says the current generation of young people who own a house carry more mortgage debt relative to income than previous generations did at the same age. So why should young people not simply go with the flow and take on larger mortgages to buy houses? Because the more they owe, the more vulnerable they are to, in the bank's words, "negative shocks to income and to higher interest rates."

Let's look at the rate risk first. There are so many cross-currents in the global economy today that it's tougher than ever to know what will happen. The U.S. seems to be improving, but China's growth rate is slowing and both Japan and Europe aren't in great shape. Falling oil prices are negative for Canada's economy, although there are offsets in the form of a falling dollar that helps feed exports. Bottom line, rate increases of any consequence seem unlikely. If there's an interest rate surprise next year, it could turn out to be a rate cut.

Income shocks are a bigger deal, and not just because of the trickle-down effect on the economy of sliding oil prices. In fact, the young adults of Generation Y are already dealing with precarious incomes. With temporary work becoming increasingly common, Gen Y lives under constant threat of the sort of income shock that comes when a contract expires without another one at hand.

TD Economics issued a report last week on youth employment in Canada and said job market conditions for this group are not as bad as some commentators say . However, even in this little-to-worry-about narrative, two concerns were raised. One is that there's evidence of young people being underemployed relative to their level of education, and the other is an increasing share of temporary work for this demographic.

The Bank of Canada itself notes that young households are more vulnerable than average to economic downturns. If it's also true that young people are carrying more mortgage debt than previous generations, it stands to reason that a weaker economy would hit them exceptionally hard.

The Real Life Ratio, introduced in a column earlier this year , will help you figure out how much house you can afford and still meet other financial obligations such as daycare and saving for retirement. If your score's in the green zone, then you're good to go (remember the 10-year rule, though). If not, then postpone your purchase.

People have always felt they were taking a big leap into the unknown when they bought first homes, but things are different today. In pointing out that today's young households carry more mortgage debt than previous generations, the Bank of Canada confirms this.

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A higher risk level for young homeowners requires more intense preparation to buy. If you're a millennial stretching to afford a home, consider using 2015 to save a bigger down payment and practise living on a tight budget. One more year living in Desperation City won't do you any harm, and it may do you some good if the central bank is right about how overvalued house prices could be.


Can you afford to buy? 

A quick tutorial on house affordability for first-time buyers:

1. Do not rely on what the bank says you can afford: Banks look at whether you have the means to repay what you borrow, not at how well you'll be able to balance your mortgage and other financial obligations.

2. Remember to consider daycare costs: They're a huge factor in household budgeting and should be considered by home buyers even before they have kids.

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3. Leave room for savings: If you can't save roughly 10 per cent of your gross pay after you buy a house, you have too big a mortgage.

4. Maintenance costs add up: A rough estimate is 1 per cent of the value of your home per year, on average.

5. Mind those condo fees: If you live in a condo, your monthly fees could easily rise at more than the inflation rate every year.

Rob Carrick

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