David Madani, economist with Capital Economics, famously predicted a price crash of 25 per cent for Canada’s housing markets; now he says that low mortgage rates are fuelling a larger correction for the two hottest markets. Madani’s 2011 crash forecast is yet to happen but he now believes that Vancouver and Toronto will see a 30 per cent drop as the labour market softens and mortgage rates rise due to higher bond yields. In a client note Tuesday Madani wrote: “Lower mortgage rates have enabled Canada’s key housing markets to defy gravity for the past few years. But with prices rising dangerously high relative to household incomes, there is the potential for a large correction down the road.” He notes that in the short term mortgage rates could be lower but the longer-term outlook is for a reversal in rates, boosting the chance of a housing correction.

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