TORONTO - Sky high prices in the Canadian real estate market won't be climbing for much longer, says a report by global rating agency Fitch Ratings.

The agency forecasted Tuesday that home prices across the country are in for a "soft landing" and will either flatten out or slightly decrease over the next five years. It estimates that current prices are overvalued by up to 26 per cent in some regions and could fall by as much as 10 per cent in some places.

Fitch Ratings said the Canadian economy will be exposed when this happens, as many home-buyers have financially stretched themselves to borrow for their home purchase and will be in for a shock once interest rates start to climb.

It noted a downturn in the housing sector will also impact jobs, as companies have scrambled to build new homes and push construction to record levels in recent years.

"With a high level of employment and individual net worth tied to the value of the housing stock, a housing downturn could have serious consequences for the overall economy," it warned in the 12-page report.

Fitch Ratings said home prices have surged more than 130 per cent since 2001, outpacing income growth by more than 80 per cent.

Despite the anticipated decline, the agency said there are several factors that will lessen the impact on the Canadian economy, including the overall low levels of unemployment and proactive government policy.

In July 2012, federal Finance Minister Jim Flaherty introduced tighter rules for mortgage lenders and borrowers — a change that industry says accounted for a slowdown in residential property sales that began the following month and continued through the first part of 2013. The efforts were aimed at avoiding a housing crisis like the one seen in the United States.

Although the policies have been successful at moderating mortgage debt, Fitch Ratings says housing prices still continue to rise.

"Government awareness has appeared to be high, and if the proactive policies specifically targeting a soft landing are successful, then flattening growth or modest decline scenarios become increasingly likely," it said.

Meanwhile, another report released Tuesday by the Conference Board of Canada also predicted that the housing market will be shielded from a hard landing.

"A crash would require a significant negative surprise like an interest rate spike or employment collapse. Since no such shock is in the cards in Canada, a housing crash like the one in the U.S. is nowhere near a possibility," said Robin Wiebe, a senior economist at the board's centre for municipal studies.

Its Autumn Metropolitan Housing Outlook found that stability in the housing sector is can be attributed to supply continuing to be in line with demographics.

Last week, the Canadian Real Estate Association reported that home resales dipped in October for the first time since February, which some saw as a sign that the housing market is in for a correction.

Transactions fell 3.2 per cent in October from September on a seasonally adjusted basis. But the number was also an 8.2 per cent hike compared with October 2012, when home sales dropped following a tightening of federal mortgage rules.

The association's national home price index also rose 3.52 per cent from October 2012 and the national average price for homes sold in October was $391,820, up 8.5 per cent from a year earlier.

Toronto, Vancouver and Calgary were responsible for much of the increase in the national home price last month. If they were taken out of the equation, the average price was up 4.9 per cent rather than 8.5 per cent.

CREA also said that the hottest markets in Canada so far in 2013 have been Calgary, Edmonton and Vancouver when judged by total sales volumes, which measures both price increases and units sold. On the flip side, the coldest markets were in Quebec City, Saguenay, Que., and Halifax, all registering double-digit declines.

— With files from Julian Beltrame

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  • 1. House Prices Are Growing At An Unreasonable Pace

    House prices in Canada have grown 20 per cent since the end of the 2008-2009 recession — and that’s when you adjust for inflation. The compare: During this time, the U.S.’s flailing housing market saw a net decrease in prices of about 10 per cent, adjusted for inflation. Maybe a better comparison would be Australia, which, like Canada, is a commodities-heavy economy that does well when resource prices are high. Australia’s house price growth during this time has been half that of Canada’s.

  • 2. We've Never Been So Indebted

    Canadian household debt has hit a record high of 163 per cent of income, meaning Canadians owe $1.63 for every dollar of income. Tha's pretty close to where the U.S. and U.K. were when their housing bubbles burst. And Canadians seem to be going debt-crazy even outside of mortgages. According to a recent RBC survey, non-mortgage consumer debt soared 21 per cent in the past year.

  • 3. Canada’s Gap Between House Prices And Rent Is The 2nd Largest In The World

    The Economist magazine reminds readers several times a year that Canada’s housing market is among the “bubbliest.” According to its data, Canada’s housing market is overvalued by 73 per cent, compared to rental rates, when looking at long-term norms. That’s the largest gap among countries where this data is available.

  • 4. Canada’s Gap Between House Prices and Income is the Third Worst In The Developed World

    That’s according to the OECD, which released a report this summer saying Canada is “vulnerable to a risk of a price correction." The OECD estimates that house prices are about 30 per cent higher than they should be, given what Canadians earn. Canada is part of a small group of countries “where houses appear overvalued but prices are still rising,” the OECD said.

  • 5. Canadian Housing Markets Are Exhibiting ‘Irrational Exuberance’

    “Irrational exuberance” is the term Fed chairman Alan Greenspan coined in the mid-90s for a market that is bubbling up. (Four years later, the dot-com bubble burst and Greenspan’s warning proved prescient.) Canada’s housing markets are also showing signs of irrational exuberance. Despite warnings from even the most optimistic market analysts that house price growth is bound to slow due to tighter mortgage rules, huge house price increases still abound in many markets. One of the most irrational markets is Toronto, where a large drop in sales in 2012 resulted in … very little change in house prices. When the market picked up again this year (sales were up a stunning 19.5 per cent year-on-year last month), the result was … little change in house prices. This is a sign of a market that has become detached from economic fundamentals.

  • 6. Low Mortgage Rates Are All That Are Holding Up This Market

    The housing market optimists, like CIBC economist Benjamin Tal, point out that, for all the increases in house prices, affordability is still actually pretty good (or at least not much worse than normal). They’re right, but this depends entirely on interest rates staying at current historically low levels. If interest rates go up, so do monthly payments, and affordability is out the window. How precarious is the situation? Economist Will Dunning, who works in part for the Canadian Association of Accredited Mortgage Professionals, estimates that even a one percentage point hike in mortgage rates would be enough to sink the market. A one-per-cent increase in Toronto would result in a decline in home sales of 15.3 per cent in Toronto, Dunning estimated recently, while prices would drop by about six per cent.

  • 7. We’ve Never Been So Dependent On Construction Jobs

    Canada’s booming housing market in the years after the 2008 economic collapse helped to hold up the economy (much of that thanks to rock-bottom interest rates), but it has also fundamentally changed the economy in ways that could prove to be bad news. With manufacturing slowly dying as a source of jobs, construction jobs have taken over the slack. Fully 13.5 per cent of Canadian jobs are now linked somehow to construction — the highest level on records going back some four decades. Compare that to the U.S., where only 5.8 per cent of jobs are related to construction. BMO economist Doug Porter believes this could be a sign of an “unbalanced” economy, and the risk here is that, when the construction market returns to normal (as eventually it must), there will be serious job losses.

  • 8. In Housing, What Goes Up Does Come Down

    The conventional wisdom is that house prices are something that just keep going up and up. But historical data shows this actually isn’t true. We have records of home sales in North America going back centuries, and throughout the years, average house prices have always trended back towards a level that’s about 3.5 times median income. So if the median household income in Toronto is about $70,000, which it is, then an average house should cost $245,000, which it certainly doesn’t. The average price of a home sold in Toronto today is $539,035, a seven-per-cent increase from last year. It’s hard to imagine Toronto house prices falling all the way back to long-term trends even <i>with</i> a housing bubble collapse, so it may be that, at least on this metric, things really <i>are</i> different this time. Perhaps people’s longer lifespans and greater willingness to take on debt have changed the market permanently. Perhaps.

  • 9. Some of the World’s Most Trusted Economic Sources Are Worried

    “Because they said so” is not a good reason to believe anything, but it is telling to see who’s worried about a housing bubble in Canada. Here’s a quick rundown of the people and institutions that are saying a day of reckoning is approaching for Canada’s housing markets. <strong>Goldman Sachs</strong> has warned of a “large correction” in Canada’s housing market, due to what it sees as overbuilding of housing units. <strong>Renowned U.S economist Robert Shiller</strong> fears Canada is experiencing the U.S.’s housing bubble burst but in “slow motion.” <strong>Nobel prize-winning economist Paul Krugman</strong> thinks Canadians have taken on way too much debt, and a “deleveraging shock” is likely in the cards. <strong>The Economist magazine</strong> calls Canada’s housing markets among the “bubbliest” in the world, noting that house prices are way above normal levels compared to rent and income. <strong>The Organization for Economic Cooperation and Development (OECD)</strong> says Canada has the third-most overvalued housing market in the world, and is part of a group of countries “most vulnerable to the risk of a price correction.”

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    This house in Montreal's old-money Westmount area was built in 1857 and, with its awesome wrap-around porch, may be the coolest heritage residential building for sale in Canada right now. It's actually three units -- a main house, a townhouse in the back and what's referred to as the "well house." Three bedrooms and two baths in the main house.

  • Montreal - $3.25 million

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  • West Vancouver - $7 million

    Can you say house with a view? This four-bedroom property features not only one of the best views out of anyone's living room window in the country, it also has an outdoor pool, sunk slightly below house level, with views all its own. Four bedrooms and an elevator in this house the realtor describes as an "amazing entertainment home."

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