OTTAWA — It’s not a bubble, it’s a balloon. Unlike the catastrophic decline the U.S. housing market experienced in 2008, Canada’s housing market is expected to deflate slowly rather than pop, according to BMO Capital Markets chief economist Sherry Cooper.

Cooper’s report says that despite rising household debt, low interest rates and rising home prices, it is unlikely that a sudden correction will take place.

"The main take-away is that the national housing market appears somewhat pricey, but is far removed from bubble territory," Cooper said in the report, titled Will Canada’s Housing Boom Forge On, Fizzle Out, or Flame Out?

The study, co-authored by BMO senior economist Sal Guatieri, says that despite rising home prices in most of Canada’s major cities, that growth doesn’t seem to be excessive.

On average, home prices have risen 104 per cent in the last 10 years. Along with that, the average price of a home has risen against the average income in Canada. In 2001 the price-to-income ratio was 3.2 nationally, rising to 4.9 in 2011.

"Elevated valuations, however, do imply a risk of material correction in the event of a shock," the report says. If interest rates were to spike by about four percentage points the affordability of homes would quickly drop throughout the country.

However, the authors say the chance of a four-point spike are unlikely in the next two years based on projections of low inflation and low growth in the economy.

"Although growing debts are a concern, we do not believe that most households are close to an American-style ‘debt wall’, or that they will run into one when rates climb," it says.

Two-thirds of mortgages in Canada are fixed term, and the report says most homeowners with variable rates will be able to lock in when rates begin to climb.

"Except for a few remaining hot spots, the national housing boom has already cooled. Sales and price growth has moderated this year, and there are few signs of market imbalances or overbuilding," the report says.

Cooper and Guatieri point specifically to Vancouver where, along with the rest of British Columbia, housing prices have begun to decline.

The BMO report points to four urban centres where the price-to-income ratios have increased beyond most of the country: Victoria, Vancouver, Toronto and Montreal.

Vancouver, the authors say, has had the highest jump in housing prices — up 159 per cent in the last decade — and has seen the price-to-income ratio in the city double to 10.

Even though Toronto has seen the relatively modest rise to home prices since 2001, 84 per cent, the city’s price-to-income ratio is now 6.7, up from 4.3 10 years ago.

The authors say that much of the increases in Toronto and Vancouver are due to the influx of immigrants from China and the great deal of capital that they bring with them.

According to the report sales in the real estate market will be mostly flat through 2012. She says Alberta will likely lead the way in home sales, while British Columbia will show continued weakness through the year.

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