Rising interest rates and government policies such as foreign buyer taxes and stricter mortgage lending rules are gently letting the air out of what many viewed as Canada’s housing bubble.

Most forecasters believe the market will be stable over the next year or two, with prices appreciating at a much slower level than during the previous decade. The average price of a home in Canada was $304,663 in 2008. In October of 2018, it was $496,800.

“Canadian households’ love affair with debt has recently diminished,” says a report from TD Economics. “Led by the slowdown in mortgage lending, growth in household credit cooled to just 3.7 per cent year-on-year in Q3 ñ the slowest pace since the 1980s.

“It’s been more than a decade since Canadians have seen the 1.25 increase in interest rates that has transpired over 16 months,” says the report. “Mortgage debt outpaced consumer debt from 2010 through the first half of 2017 but has slowed dramatically over the past several months. Some readers may find it surprising that mortgage credit is expanding at the weakest pace since the early 1980s.”

Canada Mortgage and Housing Corp. (CMHC) says housing sales peaked in 2016 and are likely to continue to gradually moderate. They may rise slightly in 2019, but slower employment and GDP growth will put a damper on sales in 2020, says the federal housing agency.

“In combination with higher borrowing costs and slower income growth, MLS price growth is forecast to slow at the national level this year,” says CMHC. “By 2020, demand is expected to continue to shift towards relatively less expensive housing options such as apartment condominiums. This combined with slowing growth in economic conditions will lead to modest average growth” in prices over the next few years, it says.

BMO chief economist Douglas Porter says, “It’s looking more and more like a prolonged period of calm could be setting in for Canada’s housing market, or outright stagnation in some of the major centres.”

At RBC, senior economist Robert Hogue says, “We expect overall activity to stay more or less in a holding pattern over the coming year as rising interest rates, the mortgage stress test, market-cooling measures in B.C. and stretched affordability continue to exert significant restraint on homebuyer demand. Our view is that these factors will limit the home resale recovery to a small 2.8 per cent gain in Canada in 2019, reversing just a fraction of the 10.2 per cent decline we project for 2018ÖWe project Canada-wide prices to increase just barely by 0.8 per cent next year following a 3.1-per-cent gain this year (and an average rise of more than 10 per cent in the past two years).

Not everyone is as confident that a soft landing is underway.

Swiss-based UBS, in its Global Real Estate Bubble index, has Toronto and Vancouver ranked as the No. 3 and 4 most vulnerable bubble-risk cities. (The top two are Hong Kong and Munich.) UBS says the term “bubble” refers to “a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. But historical data reveals patterns of property market excesses.”

It says in Toronto, “Since the waning of the housing frenzy in the middle of last year, prices have stabilized over the past four quarters. In inflation-adjusted terms, they are 50 per cent higher than five years ago.” Although government policies such as a non-resident buyer tax, a tax on vacant homes and rent controls should limit sharp price increases for now, UBS says a short-term weakening of the Canadian dollar could again attract foreign buyers.

In Vancouver, UBS says, “Imbalances increased again as house prices rose in the past four quarters at a double-digit rate in real terms. Real prices have doubled in 12 years. As the government tried to contain speculation, the tax burden is rising for high-end property buyers and foreign purchasers. This already strained affordability will become an acute issue if mortgage rates rise further, one that may halt the local market boom.”

With more interest rate hikes coming in 2019, Porter says, “For the first time in a decade, borrowers coming off a five-year fixed-rate mortgage will soon be doing so in a world where current rates are at least as high as at origination.”

The TD report says although credit growth is slowing, the higher rates will raise the cost of servicing mortgage debts. Some borrowers may need to stretch their amortization rates back to the maximum limit to absorb the higher costs.

“In the absence of a recession, most households should be able to weather increased debt service costs, and so far there’s little evidence that higher rates are putting pressure on households’ ability to meet their financial obligations,” says the report. “In fact, mortgage delinquency rates are at the lowest level since the 1990s. Insolvencies filed by consumers have edged (up) slightly from a year ago but remain at a level that is little different from the average that prevailed since 2011.”