House-poor adults aged 35-44 carry heaviest debt load

Canadians aged 35 to 44 are heavily in debt, in part because of the high prices theyve paid for housing, and are vulnerable to a rise in interest rates or a drop in house prices, according to an RBC study.

The study, based on Statistics Canada data from 1999 to 2012 about household debt and home prices, highlighted a sharp divide between the 35 to 44 age group and Canadians 45 and up.

While both groups saw their net worth rise between 1999 and 2012, 60 per cent of the increase was a result of rising home prices, the study found.

That period saw a historically high rate of house price appreciation, up 4.6 per cent per year, compared to an average of 0.3 per cent a year over the previous 20 years.

What we're seeing is that net worth is improving, but it's almost exclusively reliant on real estate for this one age category [35 to 44], said Paul Ferley, RBC economist.

The group in their 50sis building a retirement nest egg and showing improved levels of saving, but when they were in their 30s, they paid much lower prices for housing than the new generation of home owners.

There's been sort of an increase on debt that's been taken on by this age category to fund this purchase and that debt load is higher than what we're looking at in the earlier period. So this age group is becoming more indebted to make this sizable purchase, he added.

First-time buyers

Those who are 35 to 44 now were most likely to be buying their first home in the period from 1999 to 2012 and are significantly more leveraged that the older cohort because they had to pay more, RBC found.

But although they paid record low mortgage rates, they have not paid off that debt as quickly as might have been expected, the study found.

There has been a shift in preference for current consumption at the expense of future consumption, resulting in less saving, the report said.

The 35 to 44 age group also has higher levels of line-of-credit debt and vehicle loans, the study found, an indication they may be using the equity in their homes as security for other kinds of consumer spending.

Every demographic seems to be increasingly drawing on a line of credit, the report said, but those aged 35-44 are the biggest spenders.

Vulnerable to rate hike

Ferley points out the vulnerability of highly leveraged households.

Where we get a bit more concerned is in terms of more vulnerability to so called ... economic shocks. An unforeseen sort of development like a marked falloff in housing prices or a sudden spike in interest rates or a big bump up in terms of the unemployment rate, he said.

With this age category being more extended in terms of the debt they've taken on, relative to the other age categories, it makes them more vulnerable to that kind of shock.

RBC is predicting a soft landing for the housing market, despite continually rising house prices and does not expect interest rates to move up sharply. Most economists forecast a modest increase in rates in 2015.