Canadian Press

TORONTO (CP) - Canadian home price increases are not sustainable in the long term, a report from the Bank of Nova Scotia economics department says.

The fundamentals of Canada’s real estate market are solid, with little evidence of overbuilding or speculative buying, and a low volume of subprime mortgage lending to risky borrowers, Scotiabank economist Adrienne Warren said Thursday.

“Yet, there is little doubt that current trends are unsustainable,” she said.

“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.”

Additionally, “from a long-term perspective,” there is growing overvaluation in some parts of the country, “a precursor to a period of softening conditions,” the report says.

Scotiabank surveyed 15 cities, and all except St. John’s, N.L., have inflation-adjusted prices above their long-term trend. The national average deviation was eight per cent, ranging from one per cent in Ottawa to 25% in Edmonton.

“Some deviation from underlying trends is to be expected at the late stage of a housing boom,” Warren observed.

“At the peak of the prior two housing cycles in 1976 and 1989, national home prices were 12% and 18%, respectively, above their long-term trend. The smaller degree of overshooting this time around, and the sustainability of price appreciation, may reflect in part an undervaluation of Canadian real estate prices in the late 1990s and into the early part of this decade.”

Warren added that Canada’s overvaluation is small compared with other countries such as the United States, and price growth “remains consistent with short-term supply-demand dynamics.”

However, she cautioned: “The further domestic home prices climb above underlying economic fundamentals, the greater the risk of an eventual correction.”

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