TORONTO - Economist and author Jeff Rubin, who predicted the bursting of Canada’s last major housing bubble, warns many Canadians will soon regret the hefty prices they’re paying to enter the property market.

The often controversial former chief economist of CIBC World Markets says there’s another bubble building — in interest rates -— which could be on the rise by the end of next year. That will squeeze homeowners who took out variable-rate mortgages, betting they would stay at rock-bottom for a long time.

The author of “Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization” told Reuters that long-dormant inflation rates will soon pick up, thanks to energy prices, leaving central banks little option but to start tightening.

“This is an inflationary world, not a deflationary world, and today’s interest rates are a total head fake,” he said.

Well-known in Canada for his often contrarian calls, Rubin gained fame after a 1989 prediction that the Toronto housing market was about to fall by 25 per cent. The call angered many in the property sector, who derided him as outrageous and irresponsible.

Vindication came when John Crow, one of the most hawkish governors in the Bank of Canada’s history, caught borrowers off guard by jacking up rates in his campaign to crush inflation. Toronto housing prices took years to regain previous highs.

Rubin said that call hinged mainly on his reading of Crow’s personality. By contrast, there are a host of factors supporting his current forecast for a return of inflation and interest rates closer to historic norms.

Deflation has recently ranked as a bigger concern for policy-makers than inflation, with the global financial crisis triggering massive layoffs and creating a huge amount of spare capacity in the economy, factors that typically dampen inflation pressures.

Inflation returned to Canada in October after a deflationary bout in which price fell for four straight months.

Rubin said oil prices, now back above $71 US a barrel, will soon begin increasing inflation pressures as crude rises back above $90 by the end of the winter and $100 by the end of 2010.

He sees the trend feeding into prices throughout the economy, forcing central banks, now mostly concerned with preventing a double-dip recession, to return interest rates to more normal levels.

“Mortgage rates and debt loads aren’t particularly onerous at today’s interest rates,” he said.

“Where concern comes into the equation is that people strap on record debt levels at today’s unsustainably low interest rates to find out that, two years from now, when interest rates are 300 to 400 basis points higher than they are today, that those housing purchases are no longer affordable.”

Rubin said home buyers should also give careful thought to where they buy, given the likelihood of a long-term rise in energy prices and commuting costs, with the value of more distant neighbourhoods likely to fare poorly over time.

“More and more people are going to live closer and closer to where they work. And what I suspect we’re going to see is depopulation of the far-flung suburbs and increasing urban density in the cities,” he said, warning of a doubling of gasoline prices.

“Stuff around the subway line is going to carry a premium . . . because, at $2 a litre, commuting the 40 or 50 miles in your SUV ain’t gonna work.”