Many experts and economists, from the OECD to the IMF, agree the Canadian housing market is overvalued – the question is by how much.

According to TD economist Diana Petramala, the figure is 10 per cent. The International Monetary Fund agrees, estimating Canada's real estate is 10 per cent too expensive, according to an assessment of the Canadian economy released today.

In her quarterly regional housing report issued Monday, Petramala says prices in cities such as Toronto, Ottawa and Vancouver are more overvalued than markets in the Prairie and Atlantic regions.

Petramala admits she was surprised by the sharp hike in housing prices in 2013 – about 10 per cent across Canada — but she expects rising rates to cool things down over the coming few years.

“Looking forward, the combination of softer demand and rising supply of homes for sale on the market will likely pull some steam out of home price growth,” she writes in her report.

“Slower home price growth, rising incomes and only modestly rising interest rates will help keep housing in check over the next few years.”

While 2014 is likely to see stable prices on average, the bank estimated prices would edge down by two per cent in 2015-16.

Cooling housing prices

Petramala is not the only one worried about Canada’s high housing prices.

In June, the Organization for Economic Co-operation and Development said Canadian real estate was 30 per cent overvalued. In December, Deutsche Bank warned that the Canadian market was too high by 60 per cent.

Finance Minister Jim Flaherty has made moves to cool housing prices over the last few years, including demanding higher down payments and restricting mortgage terms to 25 years or less for those wanting CMHC financing.

The TD report looked at historic ratios between rent and house prices, saying by that measure, housing prices may be 60 per cent overvalued. However, it said rents are subject to provincial controls that are skewing the ratio between rents and house prices.

Instead, Petramala preferred to measure housing prices on an affordability index that takes into account both Canadian incomes and interest rates, which remain at very low levels.

The current low level of interest rates is not sustainable, she said, and she expects rising rates will help moderate housing prices over the next two years.