A sustained rise in interest rates of just one per cent could cause Toronto area home sales to tumble by 15.3 per cent and prices to decline by 5.8 per cent by 2015, predicts a veteran housing analyst.

Even a half point rise in rates, which have been edging up incrementally the last few weeks, could translate into a 9 per cent slump in sales and a 2.6 per cent drop in prices by 2015, compared to where the market stood in 2012, notes economist Will Dunning in a rates-impact assessment released Wednesday.

“Once house prices start to fall, the outcome is unpredictable,” depending on how consumer confidence is affected, he says.

“It could be that once consumers start to expect prices to fall, the reduction in demand will be larger than it needs to be (based on economic fundamentals) and therefore price reductions will be larger than they need to be.”

“Moreover, because “housing wealth” is a very strong driver of job creation, what starts as a small drop in house prices can turn into a major event for the broader economy.”

Dunning is chief economist for the Canadian Association of Accredited Mortgage Professionals, the umbrella group for mortgage brokers.

But he stresses that he did this analysis on his own because he’s been asked so many times lately what could happen to the housing market – which has already suffered a slump in sales and an easing of growth in prices since tougher mortgage lending rules were introduced last summer – if interest rates inch up from historic lows.

Many economists believe Toronto’s decade-long housing boom has been largely credit-driven and that, as rates start climbing, the bubble could burst, especially in what the Bank of Canada has warned is the city’s over-supplied condo sector.

Dunning recently cautioned that Ottawa’s attempts to cool Toronto and Vancouver’s overheated housing markets, by making it tougher for first-time buyers to qualify for financing, is likely to result in a 25 to 30 per cent decline in housing starts by 2015 and 150,000 fewer construction jobs across the country.

And that dire prediction came before many of the big banks had started incrementally increasing rates on their fixed-term mortgages in the wake of market reaction to U.S. Federal Reserve Chairman Ben Bernanke’s recent warning that $85 billion (U.S.) in monthly bond buying may be coming to an end this year.

As of Friday, BMO’s five-year fixed mortgage climbed 0.20 per cent to 3.59 and RBC’s was set at 3.69.

Dunning believes the rate increases aren’t justified and that they could retreat somewhat in the next few months. But he adds that “if the rises persist, the risks (to the housing market) are increased.”

Dunning says that Toronto Real Estate Board sales numbers for June, being released in a few days, will likely show there has been a rush of buyers into the market recently, trying to fast-track house purchases armed with pre-approved mortgage rates negotiated before rates started increasing.

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He calls that “borrowed activity from the future.”

“The real test will come in the fall,” says Dunning, when those pre-approvals have expired, especially if rates hold at their new or even slightly higher levels.