When Hilliard MacBeth sees construction cranes rising above condos across Canada, the bearish housing analyst thinks: seven per cent.

That's the percentage of gross domestic product represented by Canada's annual investment in housing, or roughly $120 billion of $1.8 trillion in GDP.

However, in light of a recent Economist magazine analysis that tracked Canada's housing prices as being overvalued by 35 per cent, MacBeth says it's clear the world is forecasting grim tidings for Canadian real estate.

In fact, if the Economist's figures are any indication, experts warn, Canada could be facing the kind of devastation the U.S. went through when its housing bubble burst in 2006.

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Edmonton-based housing analyst Hilliard MacBeth believes a housing price correction is due in Canada, and projects prices will fall by as much as 50 per cent. (CBC)

"Our bubble is bigger," says MacBeth, author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash, noting U.S. investment in housing topped out at six per cent of GDP before the crash. 

"At seven per cent, our exposure as a percentage of total economic activity is higher, and then we've got this nationwide obsession with buying homes and condos," he said from Edmonton.

The Economist isn't alone in its assessment. Bank of Canada governor Stephen Poloz suggested in December that the country's housing market could be overvalued by as much as 30 per cent.

The ratings agency Fitch and the International Monetary Fund also warned about overvaluation of Canadian properties.

According to MacBeth, those best positioned to weather a possible market correction would be debt-free millennials — those between the ages of 18 and 34 — still looking to buy.

Longtime homeowners 'in good shape'

"If they haven't bought yet, their best strategy is to save up more for a down payment, and wait for the housing bubble to burst," he said. 

MacBeth also feels that those homeowners belonging to the baby boom generation, those between the ages of 55 and 69, "should be in good shape," so long as they've accrued healthy home equity over the years.

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Stephen Poloz, governor of the Bank of Canada, said in December Canada's housing prices could be overvalued by as much as 30 per cent. (Patrick Doyle/Bloomberg)

"But, there are a few categories of baby boomers who could get into trouble with retirement because they borrowed equity in their homes" for renovations, or for co-signing mortgages for their children to become first-time owners.

He projects as much as a 50 per cent drop in house prices to match current income levels.

As for who may be in the toughest position?

"That would be people who bought recently," he said. "Those in the Generation X group, between 31 and 54, who, in my research, I discovered they have the highest exposure to real estate and the highest household debt levels, as well as the smallest amount of savings" in tax-free savings accounts, mutual funds and the stock market.

Sales still hot

Canadian home sales climbed 4.1 per cent in March from February, according to statistics released last week by the Canadian Real Estate Association.

Canadian housing prices have also risen steeply over the past decade, with the hot markets of Toronto and Vancouver seeing increases of 7.8 per cent and 7.1 per cent respectively in the past year alone.

'[A]ny downturn in housing would be felt acutely across the economy and labour market.' - Ben Rabidoux, President of North Cove Advisors

The average MLS home price index, which tracks inflation trends in the real estate sector, grew 4.95 per cent year-over-year last month. The national average sale price also rose 9.4 per cent year-over-year in March.

CREA's president, Pauline Aunger characterized the recent bout of low mortgage rates as "good news for affordability," but these low rates are also driving up demand and pushing up housing values, analysts say.

Current promotional rates are as low as 2.74 per cent on a five-year fixed mortgage. 

Toronto real-estate broker Barry Lebow still remembers when rates soared to 21 per cent in 1981.

"That was nuts," he said. "But you want to know something? People still bought and sold houses."

Lebow believes a market correction now would be traumatic.

"I'm in the business and it scares me," he said. "We've got a huge percentage of the population that has never seen a downturn in real estate, including a good percentage of real estate agents. When a downturn comes, it'll be like gravity has been revealed."

CMHC not as concerned

Ben Rabidoux, a housing analyst and president of North Cove Advisors in Owen Sound, Ont., shares some of the concerns raised by The Economist, even if he disagreed with the magazine's methodology.

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The Economist magazine says Canadian housing is 35 per cent overvalued compared to incomes, and 89 per cent overvalued compared to rents. (Aaron Harris/Reuters)

"Prices at record multiples of incomes with rates butting up against the zero … is concerning, as is record household debt levels," Rabidoux said.Inflated costs for buying today's homes, mixed with low interest rates, spells trouble in Canada, especially as residential investment is at the levels matching the housing downturns in the 1970s and 1980s, he said.

Meanwhile, he pointed out that employment in construction as a percentage of total employment is at record highs, "meaning any downturn in housing would be felt acutely across the economy and labour market."

For its part, Canada Mortgage and Housing Corporation has a rosier outlook. 

The Crown corporation maintains Canada's homes are only "modestly" overvalued on average, with prices outpacing income increases by about three per cent.
CMHC's chief economist Bob Dugan classified Canada's housing market as "low risk" overall for a market correction.

"Overvaluation as a factor on its own is good information," he said. "But, typically, if you're going to see market correction, you're going to see more risk factors together" such as overheating, overbuilding and an acceleration of price growth.

Dugan said CMHC will be publishing an updated report on April 30 with a summary of housing statistics in a dozen major markets across Canada.