The hot housing markets in Vancouver and Toronto appear to be on the verge of a severe downturn that could hit Canadian economic growth, says Senior Canadian Economist at Capital Economics David Madani.

“I see a correction of between 20 to 40 per cent in the Canadian housing market – over five years,” Madani told BNN in an interview Monday.

Madani says the current hot housing markets in Vancouver and Toronto are in a speculation-fueled bubble that appears to be on the verge of bursting. And once home prices take a breather, the housing markets will begin a severe correction, he says.

“In a speculative housing bubble, once prices stop going up the whole reason for speculating in the market disappears,” Madani said.

Vancouver home sales in May fell 8.5 per cent from a record peak a year earlier, but surged 22.8 per cent from April and were 23.7 per cent above the 10-year sales average for the month, according to data from the Greater Vancouver Real Estate Board. But that uptick was largely driven by low mortgage rates and is unsustainable, said Madani.

“The uptick in Vancouver home sales is nothing more than a head fake, while the worsening sales slump in Toronto’s much larger housing market points to a correction in prices,” said Madani in a report.

Sales of homes in Toronto dropped 20.3 per cent in May from a year ago, while the average home price in the region fell about six per cent from April, according to the Toronto Real Estate Board.

Continued softness in the Toronto housing market could impact Canada’s GDP, said Madani. “Considering that Toronto accounts for 20 per cent of the national housing market, this slump in sales will hit national second-quarter GDP, subtracting as much as 0.5 percentage points,” he said.

A slowdown in the housing sector could create a drag on consumer spending as consumers cut back on household consumption, said Madani. “Housing investment will be a drag on second-quarter GDP growth,” he said. “We estimate that growth could be as weak as 1.0 per cent annualised. But even if growth turns out somewhat better than this, the economic outlook for this year and next appears to be worsening.”

The warning from Capital Economics echoes similar sentiments earlier this week from the Organization for Economic Co-operation and Development. One of the main risks facing Canada’s growing economy was a potential “disorderly” correction in “overheating” housing markets in Toronto and Vancouver, said the OECD.

“Such a correction would reduce residential investment, household wealth and consumption. A sufficiently large shock could even threaten financial stability,” it said.

Continued softness in the Toronto housing market could impact Canada’s GDP, said Madani. “Considering that Toronto accounts for 20 per cent of the national housing market, this slump in sales will hit national second-quarter GDP, subtracting as much as 0.5 percentage points,” he said.

A slowdown in the housing sector could create a drag on consumer spending as consumers cut back on household consumption, said Madani. “Housing investment will be a drag on second-quarter GDP growth,” he said. “We estimate that growth could be as weak as 1.0 per cent annualised. But even if growth turns out somewhat better than this, the economic outlook for this year and next appears to be worsening.”

The warning from Capital Economics echoes similar sentiments earlier this week from the Organization for Economic Co-operation and Development. One of the main risks facing Canada’s growing economy was a potential “disorderly” correction in “overheating” housing markets in Toronto and Vancouver, said the OECD.

“Such a correction would reduce residential investment, household wealth and consumption. A sufficiently large shock could even threaten financial stability,” it said.