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The London-based research firm Capital Economics Ltd. has added a new spark to Canada's housing debate with its assessment that the country's real estate market is a bubble that is about to pop.

The boom in Canadian real estate has "resulted in the largest rises in house prices ever seen in Canada," the firm says.

"And the trigger of an increase in the Bank of Canada's trendsetting interest rates could result in a 25-per-cent drop in property values," it adds.

The organization released the research earlier this year in a report for its subscribers, and it received new currency from Bank of Canada Governor Mark Carney's statement warning Canadians that they should expect real estate prices to begin to moderate.

We think [a bubble] exists and we expect a major correction in Canada's housing market of up to 25 per cent over the next three years," Capital Economics wrote in its response to Carney's remarks. "The decline in prices is likely to be most severe in Vancouver."

Capital Economics' report hasn't generated a consensus, but it does add new fuel to the discussion about what is likely to happen next, particularly in markets suh as high-priced Metro Vancouver, which has well-known problems with real estate already being unaffordable for many.

However, some other analysts do not concur that the imbalance of prices to income will necessarily lead to a sudden correction, particularly for a region like Metro Vancouver.

Housing markets can diverge from a balance between prices and incomes and remain out of balance for a long time, argues housing economist Tsur Somerville, director of the centre for urban economics and real estate in the Sauder School of Business at the UBC.

"The fact they're out of balance, in an economic sense, doesn't mean they're going to get back into balance on anybody's particular timeline," Somerville said.

Somerville argues that for Metro Vancouver in particular, using the price for a two-storey house - which would be more than double the national average - isn't indicative of the kinds of housing people are living in and the decisions they make about where they live.

And while Canada and Metro Vancouver continue to deal with problems of housing unaffordability, Helmut Pastrick, chief economist for Central 1 Credit Union, argues that long-term demographic trends indicate those problems will continue to persist long into the future, and not just in Canada.

"The world population is seven billion, climbing to 10 billion, and the planet isn't growing," Pastrick said.

Source: Derrick Penner, Vancouver Sun

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