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Nov 19, 2010

Dean Baker, one of the first economists to predict a bubble in the US housing market in 2002, is warning of an almost imminent 25-30 percent value drop in the Canadian real estate market.

He says that unless steps are taken soon to rein in the sector than Canada is headed for a U.S. style real estate collapse.

Its fairly common for economists to make grand predictions about Canada’s housing market but Dean Baker’s resume gives his grim outlook some credibility.

Baker was one of the first economists to assert that the US housing market of 2002 was a bubble, well before its peak in late 2005, and one of only a few economists to predict that the collapse of this bubble would lead to recession.

He now feels that the debt-to-equity ratios in Canada are near the level that the United States experienced prior to its economic crisis. He believes that a rise of just two percentage points in Canadian interest rates could cause a 25-30% free-fall in the value of Canadian real estate.

“There’s a lot of things that look ominous. Debt to income ratios in Canada are close to what they were in the U.S. at the peak of the bubble, so there could be some pretty serious fallout.”

He also explains that the average price for a home in Canada is about 50 percent higher than in the U.S., while our average income is lower.

Baker thinks the numbers in Canada’s real estate market just don’t add up.

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