Photo: James Bombales

After a period of cooling earlier in the year, plenty of headlines have focused on a rebound in the Canadian housing market over the past quarter. But according to a new report, industry watchers should prepare for a period of “slower price growth” over the next five years.

That’s because a rising interest rate environment should keep housing prices from climbing too quickly, according to the latest forecast from Moody’s Analytics and RPS Real Property Solutions.

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“The [Bank of Canada] will continue to tighten short-term interest rates through 2020 in order to head off inflation,” writes Moody’s economist Andrew Carbacho-Burgos, in the report. “With some lag, monetary tightening will pull up mortgage rates.”

The projection also reviewed which Canadian housing markets are over and undervalued. Coming in first was Toronto, which Moody’s believes is overpriced by 51 per cent, a 2 per cent drop from May. Meanwhile, Vancouver was considered overpriced by 40 per cent.

Undervalued cities included Edmonton, which Moody’s considers to be underpriced by 20 per cent, while most Atlantic cities are listed as “moderately undervalued.”

“The national housing market still has a long way to go before it regains the level of affordabil­ity it had before 2015, when prices in Toronto and Vancouver took off, but has now taken the first steps to do so,” writes Carbacho-Burgos. “The important points are, first, that there is no serious projected house price correction,” he added.

Another important point? That median family income growth has a good chance of keeping up with, and potentially outpacing, home prices in the next five years. That, combined with a lack of a significant home price decline should prevent mortgage debt performance from deteriorating, according to Carbacho-Burgos.

“The main downside risk now is that the measures taken to stabilize housing affordability and mortgage credit quality may prove too strong and may precipitate not just a house price correction, but also an extended decline in sales and possibly a reduction in homeownership,” he writes. “However, the data for July and August indicate that home sales and house price growth have started to rally, so it is too soon to be pessimistic.”

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