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Toronto, Vancouver home prices could plunge 30%,

His forecast from February 2011 has yet to materialize but that didn’t stop Madani, of Capital Economics, from forecasting a price correction of as much as 30 per cent in Canada’s two most expensive cities.

“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,” said Madani, in a note out Tuesday.

“The Vancouver and Toronto housing markets appear to be enjoying a revival of late, in contrast to most other markets in Canada. But with labour market conditions set to deteriorate this year and market bond yields expected to climb over the longer-term, they won’t defy gravity for much longer.”

The Toronto Real Estate Board said this month the average selling price in the city was up 12.3 per cent from a year ago to $639,184 in June. The average detached home price in the city of Toronto climbed to $1,051,912 after reaching seven figures earlier in the year.

The Real Estate Board of Greater Vancouver reported the index price for all properties in its area was up 10.3 per cent from a year ago to $694,000 in June. The average detached home is now selling for $1,422, 296.

Madani noted Canadian house price inflation has barely slowed even as oil prices have pushed the economy into recession. Some markets are experiencing corrections, he says, but the pace of gains has accelerated in Toronto and Vancouver. “This is despite them being among some of the most overvalued markets in the world,” he says. “As we have outlined before, house prices have become detached from household incomes and rents. The risk is that housing is viewed as a one-way bet, prompting the classic market emotion of greed among investors.”

He doesn’t think the trend can continue much longer in Toronto and Vancouver as the oil shock threatens jobs and affordability is eroded even with mortgage rates below two per cent. Madani says a median priced house with mortgage payments based on the latest 5-year fixed rate will take 64 per cent of household income in Vancouver and 40 per cent in Toronto.

“Although mortgage rates have been declining for the past few years and could dip lower should the Bank of Canada cut rates further, we expect this trend to reverse as market forces push Canadian bond yields higher over the next few years. Under these circumstances, we expect house prices to fall,” Madani wrote.

Garry Marr