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Is it Canada's Turn to Face a Housing Correction?

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Canada's economic assets -- its embarrassment of natural resources, low interest rates, sturdy banks that survived the financial crisis, and a conservative mortgage market  --  all add up to, well, not enough in the eyes of one Globe and Mail columnist.

George Athanassakos, a professor of finance at University of Western Ontario, is warning that our neighbors in the Great White North may be facing a housing correction in the near future.

Optimists argue that the runup in Canadian home prices has been based on strong demand from homeowners, while construction in the U.S. ran well ahead of actual demand and was fuelled by speculators.

But there’s another side to this debate. I believe that Canada’s high house prices in relation to incomes, combined with record household debt levels and overinvestment in residential construction, will cause a severe correction in the real estate market.

Home prices are simply way out of line, especially when viewed in relation to household income. The ratio of house prices to income has historically averaged about 3.5 in Canada. It now stands at about 5.5. It is difficult to see how income growth in the future can bring this ratio close to the historical average within any reasonable period – so it follows that house prices will have to decline.

Read the full story, here.

The prof's warning will likely join a list of other pressing issues to be debated before the country's May 3 snap election, one called in the wake of findings that the ruling Harper government  was in contempt of parliament.

But fortunately for Canada's sizable francophone population, the head of all four major parties looking to win federal seats next month still have their priorities straight:


POSITION:  No positions in stocks mentioned.

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