One of the first economists to predict the U.S. mortgage crisis warned Wednesday that Canada's housing sector could be headed for a sharp correction.
Dean Baker of the Washington-based Centre for Economic and Policy Research said he sees no reason why average home prices in Canada should be about 50 per cent higher than in the U.S.
Baker said if interest rates rise by two per cent, Canadians could see house prices collapse by 25 to 30 per cent.
Given the potential damage, Baker said the federal government should consider regulations to further tighten mortgage lending and the Bank of Canada should consider raising rates.
Ottawa has already moved once, in February, to tighten lending requirements.
And on Oct. 19, the Bank of Canada left its key interest rate unchanged at one per cent after three consecutive quarter-percentage-point increases, saying that the Canadian outlook had changed and that it expected full recovery to take a year longer than it had earlier predicted.
After that, many economists predicted the central bank would avoid raising rates further for a matter of months.
Baker was recently given the Revere Award along with two others for being the first to sound the alarm on the U.S. housing bubble five years before it burst.