"Canadian housing activity remains buoyant, though the underlying fundamentals for continued gains are becoming less favourable," according to the bank's Global Real Estate Trends report, published Wednesday.
It estimates that Canada's average inflation-adjusted home price was up 2.5 per cent in the April-June period, compared with the second quarter of 2012 — about the middle of a 23-country ranking published by Scotiabank on Wednesday.
"Low borrowing costs and balanced market conditions continue to attract buyers, though slowing job growth and the recent uptick in fixed mortgage rates will likely cool activity later in the year and into 2014. Affordability also is challenged in some of Canada’s largest urban centres, primarily for single-family homes."
Housing construction will slow as a result, with starts expected to fall to about 170,000 units next year, Scotiabank says in its Global Real Estate Trends report.
The Scotiabank report, which is consistent with other industry data, also raises concerns about an oversupply of condominiums in major Canadian cities as demand for new units weakens.
For example, in Toronto, purchases of new units has fallen sharply over the past year, as expectations of lower returns have made condos less attractive investments.
However, the report notes that condo resales — a market that is dominated by buyers who want to live in the unit they're purchasing — have been holding up in Toronto.
Despite the slowdown in construction, Scotiabank says a record number of new condo units will come onto the Toronto market over the next two years. The supply is expected to exceed demand and to reduce condo prices
The report notes that imbalances are also beginning to appear in the Montreal and Vancouver condo markets, and that builders are responding by slowing down the pace of new construction of multiple-dwelling units.
New apartment starts were down 30 per cent in Montreal and 10 per cent in Vancouver this year, the report says.
Canada's increase in the second quarter lagged the United States, which is recovering from a much deeper and longer downturn that began in 2007.
Scotiabank says U.S. home prices increased by about eight per cent in the second quarter, after adjusting for inflation.