OTTAWA - A new report into Canada's hot housing market is trying to calm fears of a coming collapse in prices, saying the biggest threat to home valuations may be government meddling with mortgage rules.
The paper by economist Will Dunning, who runs a real estate market research firm in Toronto, says Canadians have been mostly prudent investors in housing and that the market can absorb either higher prices or a one-per-cent hike in interest rates.
Rather than being over-valued, house prices in Canada are fairly valued and may even be undervalued, he says.
The paper was released on the same day a new Teranet-National Bank composite price index rose to a new all-time high, showing home prices rose 0.3 per cent in February.
The Bank of Canada and the federal government have warned about an over-heated housing market for several years, arguing that once interest rates start rising, the roof will cave in for some home buyers.
The Organization for Economic Co-operation and Development (OECD) has also pointed to Canada as having the world's most over-valued housing market.
But Dunning says the OECD has been using flawed comparison between cost of owning and the cost of renting homes.
Dunning says the federal government, which has intervened four times in recent years to suppress higher-risk home buyers by changing mortgage rules, poses a real threat to the market.
The latest effort in July 2012 to slow the market had an impact equivalent to a one per cent increase in mortgage rates, he says, and has succeeded in reducing demand.
That, rather than over-valuations, is the main reason house prices could fall, he says.