A hot Canadian housing market has lifted prices above their long-term trend, raising risks of an eventual drop in prices, says Scotiabank.
The evaluation is made in the latest , released Thursday by Scotia Economics.
"There is little doubt that current trends are unsustainable," said Adrienne Warren, senior economist for Scotia Economics. "Affordability is becoming increasingly stretched for many would be buyers after almost a decade of rising home prices.
"More recently, economic risks have increased in the wake of the intensifying financial market turmoil stemming from the U.S. subprime mortgage problems."
From a long-term perspective, the report says there is growing evidence of overvaluation in home prices in some parts of Canada -- a common precursor to a period of softening conditions.
In all 15 cities examined, with the exception of St. John's, current inflation-adjusted price levels are above their long-term trend. The national average deviation at mid-2007 was about eight per cent.
Despite the deviation, price growth remains consistent with short-term supply-demand dynamics.
Most major markets in Canada are still "sellers' territory," in which prices are expected to rise faster than inflation.
"The further domestic home prices climb above underlying economic fundamentals, the greater the risk of an eventual correction," said Warren.
"The 1976 and 1989 housing peaks were both followed by some adjustment in real prices. In the past, this adjustment has normally occurred though a period of inflation erosion as opposed to nominal price declines."
Still, Warren said the fundamentals underpinning Canada's housing market remain quite strong.
""Unemployment is low, immigration is high and apartment vacancy rates are tight. There is little evidence of overbuilding or speculative buying," she said.
"The industry also has relatively little direct exposure to subprime lending, with these loans accounting for only about five per cent of domestic mortgages in recent years compared with about 20 per cent in the United States."
The report follows a release Wednesday that found more Canadians than ever before owned their dwelling.
Statistics Canada said about 68.4 per cent of Canadian homes were owned by their occupants, up from 65.8 per cent in 2001.
The Royal Bank of Canada also released a report Wednesday, which showed the cost of owning a home in Canada continued to rise in the second quarter of 2007.
