Fears canada property bubble will burst

A Bank of Canada rate hike later this year could trigger a multi-year, 25-percent collapse in housing prices, an economic consultancy warned yesterday.

"The recent housing boom has resulted in the largest rises in housing prices ever seen in Canada," said David Madani, a Toronto-based analyst with Capital Economics. "Unfortunately, the subsequent fall in prices could be just as severe as those elsewhere."

Madani, among the most bearish economists on Bay St., said the firm predicts housing prices could fall by a cumulative 25 per cent over several years, which could be triggered this year if the Bank of Canada opts to raise its benchmark rate again. He warned even small increases in interest rates could exacerbate matters, as they can Change consumer perceptions toward housing.

"If the Bank of Canada does resume (interest rate hikes) this year, this could prove to be a tipping point for a house price collapse," said Madani, among the few economists who believes the central bank will not raise rates in 2011.

Source: Montreal Gazette