Canadian real estate prices are inflated, but they're unlikely to correct themselves in the short term, a Bank of Nova Scotia report suggests.

Canadian real estate prices are up an average of 86 per cent in the past decade. (CBC)

"Canadian house prices are rich no matter how one looks at it," Scotia economists Derek Holt and Karen Cordes said in a report titled Is There a Canadian Housing Bubble?

Of the many ways of gauging the health of a real estate market, affordability is one of the least useful because any measure that essentially compares income with mortgage payments is dependent on interest rates, Holt said Tuesday. Rates are at record lows at the moment, as the Bank of Canada's benchmark rate sits at 0.25 per cent.

Comparing current and past prices is more useful, the report says, and under that metric, Canadian housing prices are in eye-opening territory. The U.S. S&P/Case Shiller index rose 100 per cent between 2000 and its peak in mid-2006. The Canadian equivalent is up 86 per cent during the past decade.

'House prices are rich no matter how one looks at it.'— Scotiabank economists Derek Holt and Karen Cordes

Looking at real estate on a price-to-rent perspective also suggests speculative activity, as the ratio of housing prices to how much the spaces could bring in rental income has more than doubled since 1981.

"All combined, while not all measures are at record, the general picture is one of lofty Canadian house price valuations," the report noted.

Two of Canada's three largest urban centres, Toronto and Vancouver, have generally led the housing boom. Together, they represent one-fifth of the Canadian marketplace.

These conditions are likely to persist for some time, the report says, in part because the Bank of Canada has given no indication it plans on raising interest rates until the second half of 2010, and even then, not materially until 2011 at the earliest.

Colorado couple Angela and Tim Sneary went into foreclosure in 2007. (Ed Andrieski/Associated Press)

"Low interest rates are driving healthy affordability right now, but this effect will wane in the next two to four years," the report reads.

In addition, a small supply of homes on the market has pushed up demand for whatever housing is available.

Also, mortgage innovations have swelled the ranks of buyers, a condition unlikely to change. Twenty-five-year mortgages used to be the norm, until 30-, 35- and 40-year mortgages became available in 2006.

Today, 18 per cent of Canadian mortgages are for terms longer than 25 years, and 10 per cent are amortized over 35 or 40 years, the report notes.

No slump seen imminent

Calling it a "once in a century confluence" of housing drivers, the report expects Canadian real estate to remain at high levels in the immediate future.

"Flagging rich valuations is not, however, tantamount to predicting anything imminent by way of a give-back on prices," Holt said. In fact, they could well push further into record territory next year before risks creep in, he said.

Indeed, though the report raises numerous red flags for Canadian real estate, it says any unwinding is unlikely to be similar to the devastation experienced in the United States, where subprime mortgages were far more common.

The Canadian subprime mortgage market makes up about five or six per cent of the overall market, about a third the level in the U.S. at its peak.

In addition, the U.S. market was inflated because mortgage interest in America is tax deductible, something that is generally not the case in Canada. American lenders also have generally lower appraisal standards than those Canada, the report says.

On Monday, U.S. data emerged suggesting one-quarter of American homeowners are "under water" — owing more on their mortgages than their houses could be sold for.

And the U.S. Mortgage Bankers Association revealed last week that a record one in seven U.S. mortgages, or four million homeowners, were at least one payment late in the third quarter, putting them technically into foreclosure territory.