Canada’s housing market has enjoyed strong sales and rising prices for 13 years, defying the predictions of observers who have been calling for a crash.

Scotiabank Group says of the 10 developed economies it tracks, average inflation-adjusted home prices were less than they were a year ago in seven of those countries. Only Canada, France and Switzerland showed price increases.

Scotiabank Group’s Adrienne Warren says Canada’s inflation-adjusted home prices are up 85 per cent since 1998. While impressive, that’s the "middle of the pack" of price gains, says Warren. Ireland, which had a 15-year housing boom, saw prices increase by 330 per cent from 1992 to 2007. Since then, prices have dropped considerably but Ireland still retains the largest cumulative price growth.

Canada’s "relatively smaller cumulative price increase compared with some of the frothiest markets reflects in part a later take-off," says Warren. "Canada’s residential real estate boom started several years later than most of its counterparts, with the economy still feeling the effects of the deep recession of the early 1990s and weak labour markets through mid-decade."

In 2011, annual price gains are estimated to be up 7.5 per cent and sales are up 2.2 per cent over 2010.

So with the softness in global housing prices and with the U.S. market showing few signs of a quick recovery, will the doomsayers finally be proven right? Is Canada’s housing market about to experience a downturn? Is the bubble about to burst?

A recent International Monetary Fund report says high household debt levels combined with high house prices could be a "source of vulnerability" for Canada. It says a housing crash like the one in the U.S. is unlikely, but that "adverse macroeconomic shocks" from the global economy could cause significant job losses, tighter lending conditions and declines in house prices.

In another report ,Sonya Gulati, an economist with TD Economics, says, "We believe that the average Canadian home price is over-valued by roughly 10 per cent. Metrics like price to income, price to rent and affordability all support this conclusion. We expect the price excess will gradually unwind over the next two years in light of a softening in employment conditions in 2012 followed by higher interest rates in 2013."

Warren says, "Generationally low interest rates will remain a powerful draw for Canadian homebuyers and real estate investors, though the recently softening in hiring activity may moderate demand somewhat in the new year. With market conditions largely balanced, we expect price trends to remain relatively flat."

Canada Mortgage and Housing Corp. (CMHC) says, "While there have been concerns of a ‘house price bubble’ in Canada, clear evidence of it is lacking. The key characteristic of a bubble is an environment where house prices exceed levels that would be suggested by underlying demographic, economic and financial factors (migration, income, interest rates, wealth, etc.) and where the growth rate of prices is accelerating." This would result in an increase in speculative activity in the market, but CMHC says that’s not the case. It says the pace of housing starts is in line with demographic requirements; stocks of completed but unoccupied housing units are well below previous peaks; and condominium vacancy rates are "relatively stable."

CMHC also notes that the mortgage arrears rate in Canada is less than one-half of one per cent.

Gulati at TD Economics predicts that sales will record average declines of 2.4 per cent and 3.5 per cent in 2012 and 2013 respectively, and prices will drop an average of 1.9 per cent in 2012 and 3.6 per cent in 2013. That’s considerably less than some other headline-grabbing forecasts of a quick 10 to 25 per cent drop in prices.

High housing prices in Vancouver and Toronto have skewed the national average. Gulati says housing activity in most of Canada’s major markets have already "landed softly" and if Vancouver and Toronto are excluded, "the price and resale activity gains would be much more muted than the headline number would suggest."

BMO chief economist Douglas Porter says, "Vancouver will not be the hottest housing market in Canada in 2012. Despite the intense focus on the city as a bubble candidate as far back as 2010, Vancouver still saw the biggest average price increases (16 per cent) and the biggest real estate volume gains (sales and price gains combined) in Canada" in 2011. But he says that prices and sales in Vancouver are now showing clear signs of dropping.

"Toronto has seized the mantle of hottest major market in recent months, and appears to be at some risk of overheating," he says. Porter says the award for "most well-behaved market" is a tie between Calgary and Edmonton, which have had stable prices in recent years. He says if oil prices hold, those two Alberta cities may be the hottest housing markets during the coming year.

Published: January 4, 2012

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .