A new report by Capital Economics has predicted that house prices in Canada will fall in value for several years. The company report: ‘The recent housing boom has resulted in the largest rises in house prices ever seen in Canada, which have been similar in magnitude to those during the recent boom in the US. Unfortunately, the subsequent falls in prices could also be just as severe as those seen elsewhere.

‘We predict that nominal house prices are likely to decline by a cumulative 25% over the next few years, in the same ball-park as the recorded declines in the US and other countries. Growth in future personal disposable income per worker will not close the large gap between house prices and income within any reasonable length of time.

‘Various housing affordability ratios have been used to rationalise high house prices relative to income. However, this justification is flawed and potentially misleading because it fails to take account of inflation. In a low inflation environment, you should expect lower nominal mortgage rates to result in a lower housing affordability ratio. More importantly, the real burden of mortgage payments will change little over time because nominal household income is growing at a slower pace. In short, while housing affordability may seem reasonable at present, longer-term housing affordability is anything but.’

The company added that ‘even small rises in official interest rates have been shown to have a big effect on homeowner confidence. If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.’