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Fewer houses were sold in Toronto in May, 2013, but prices were 5.4 per cent from a year earlier.

DARRYL DYCK/The Globe and Mail

Home sales are stabilizing in the spring market, but housing prices are still on the rise – sharpening concerns that Canada's real-estate market is overvalued.

The latest data suggest that the number of homes changing hands is relatively steady, after a period of steep year-over-year sales declines. This is welcome news to federal policy makers, such as Finance Minister Jim Flaherty, who wanted to take some momentum out of the market to curb fast-growing consumer debt levels – which come largely from mortgages – and prevent a housing bubble from forming.

"Last year's deep downturn in Canadian home sales appears to be fading," said Bank of Montreal economist Sal Guatieri.

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Even condo developers, many of whom were scaling back amid fears of overbuilding, appear to be jumping back in the game. "If Canada's housing boom is over, someone forgot to tell condo builders," said Bank of Montreal vice-president and senior economist Benjamin Reitzes.

The value of building permits issued in April jumped 10.5 per cent on the back of a 51.9-per-cent surge in multiunit residential permits, he said.

While the steep slump in sales that began last summer now appears to be ending, it did not remove the key issue that first sparked fears a bubble might be forming in Canada's housing market – high house prices.

The Organization for Economic Co-operation and Development said Canada has one of the three most overvalued housing markets in the world, coming after Belgium and Norway. But unlike in Belgium, Canadian house prices continue to rise, putting the country at higher risk of vulnerability to a price correction, the OECD said, "especially if borrowing costs were to rise or income growth were to slow."

Falling prices tend to lag falling sales and many economists expect that prices will eventually drop, but not much. Prices have held up so far because, as demand has fallen, so has the number of homeowners listing their properties for sale, said Canadian Imperial Bank of Commerce economist Benjamin Tal. "I think we will still see prices go down in the next year or two, and it will probably start in the condo market."

Earlier this week, Toronto-Dominion Bank economists said that, while they had asserted in 2011 that house prices were 10-per-cent too high, the increase in prices has been weaker since then and personal incomes have risen, so they have revised their estimate to about 8 per cent.

The latest data suggest that the softening in prices is likely to be milder than expected. In Vancouver, the city that was the frothiest in 2011 and the hardest hit by last year's correction, prices did decline. But they're already on the mend.

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"While benchmark prices are still down 4.3 per cent from the record high of May, 2012, they have climbed modestly in the past four months," Mr. Guatieri said of Vancouver. "Some of the increase is probably seasonal, but the recent stability begs the question: If the priciest market in Canada can muster a mere 5-per-cent price correction, should not the rest of the country (and in particular Toronto) have even less to worry about … barring, of course, a larger shock than tougher mortgage rules."

Mr. Guatieri also noted that Toronto's home prices are hitting new highs. "Even the abundantly supplied condo market popped above $300,000 for the first time ever [according to the MLS Home Price Index]."

In May, sales registered on the Multiple Listing Service were 3.4-per-cent lower in Toronto than in the same month last year. But the average selling price was $542,174, up 5.4 per cent from a year earlier. The MLS home price index, which seeks to adjust for any changes in the types of homes that are selling at any given time, was up 2.8 per cent from a year ago.

Vancouver's sales rose by 1 per cent in May, compared with a year earlier, and were up 9.7 per cent compared with April. That was the first positive result since September, 2011, Mr. Guatieri noted. Calgary, meanwhile, saw a 6.9-per-cent increase in sales in May.

Mr. Tal said that while he agrees with the OECD, there may not necessarily be a housing crash. "I do not see smoke. I see a boring, slow process over five to seven years that will take fundamentals and prices back in line."

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