Photo: James Bombales

Canadian home prices have been slowly trending upwards for the past few months, with plenty of industry speculation about what the final quarter of the year might have in store for the gradually warming market.

While the market seems to have largely adjusted to the effects of a new mortgage stress test which took hold in January, a rising interest rate environment is expected to put a damper on prices for the foreseeable future.

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Two major home price indexes — Statistics Canada’s New Home Price Index and the Teranet-National Bank Composite National Price Index — will be released this week and, according to one economist, they’ll likely show more of the same relatively minor price growth.

“Both measures have markedly decelerated this year, but they are posting small gains on a seasonally adjusted month-ago basis which may indicate that the worst adjustment to factors like [new mortgage rules] is working its way through,” writes Scotiabank VP and head of capital markets economics Derek Holt, in a recent note.

The comments mirror a recent forecast from Moody’s Analytics and RPS Real Property Solutions, which predicted that the next five years would be a period of slower price growth for the market.

“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,” wrote Moody’s economist Andrew Carbacho-Burgos, in the report.

With home prices growing at a more moderate pace, it is possible that median family income could keep up with, and even outpace, prices in the next five years. But a full-blown price correction is unlikely, 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 wrote. “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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