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There is a case for more dramatic price adjustment further out if higher mortgage rates start crimping affordability, the Conference Board says.

Fred Lum/The Globe and Mail

The Conference Board isn't buying the notion that Canada's housing market will suddenly crumble, saying the most likely outlook is for a modest decline nationally and in some specific markets.

The Ottawa-based think-tank argues in a comprehensive new look at real estate in Canada that the conditions for a crash simply don't exist, despite numerous reports that the market is overbuilt and overvalued.

Rather, the report argues that with the possible exception of Toronto, housing starts the past three years have been roughly in line with the 20-year average.

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Even in Toronto, there is only a "borderline" case that it could be overbuilt.

"At this point in the housing cycle, there is a risk that Canadian housing prices in some market segments are due for a modest correction," the report states.

"Nevertheless, we believe that continued population growth, additional employment gains and modest mortgage rate increases will limit potential price declines in 2014 and 2015."

There is a case for more dramatic price adjustment further out if higher mortgage rates start crimping affordability, the Conference Board says, but even then it is likely to be a soft rather than a hard landing.

In recent years, some economists and international organizations such as the OECD, the IMF, Deutsche Bank and The Economist magazine have described Canada's housing market in stark terms, characterizing it as among the priciest in the world based on historical averages and other metrics.

But the consensus of economists within Canada has tended to be more subdued. Last week, the Canadian Real Estate Association also predicted a slowdown as mortgage rates start edging up later in the year, but it still saw the market over all growing in 2014 and 2015.

The Conference Board says fears of a housing bubble about to burst in Canada are exaggerated.

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It says some of the evidence cited by correction hawks, including comparing home prices as a multiple of rental costs, don't take into account historically low mortgage rates that keeps affordability steady. Citing Toronto, it notes that in 2013 mortgage payments consumed less than 20 per cent of average household income, the same as in 1993.

"Mortgage costs, not just house prices, are the principal deciding factor for potential home buyers," says Robin Wiebe, the think-tank's senior economist.

Even when mortgage rates do start rising, the Conference Board believes it will happen gradually and over an extended period. For instance, it forecasts rates with only a gain of 200 basis points – two percentage points – by 2017 or 2018.

But at current low rates, the typical homeowner on a posted five-year rate will have paid down $42,104 principal on a $100,000 in mortgage debt, so affordability won't be seriously affected once it comes time to renew at a higher rate.

The Conference Board provides an outlook on six major cities:

– Vancouver: Moved back into balance last spring. Recent price gains will give way to slower advances in 2014.

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– Calgary: Approaching seller's conditions, noting strong price gains last year.

– Edmonton: Balanced, with brisk resale and price growth activity last year.

– Toronto: Balanced with healthy price growth. A major correction is difficult to see given solid employment and population growth.

– Ottawa: Market cooling due to falling employment from the government sector, flatter sales and tempered prices.

– Montreal: Flirting with buyer's market conditions with sales and average prices having dropped somewhat last year.

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