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The influential Organisation for Economic Cooperation and Development has said that Canadian housing “looks” overpriced both in terms of price-to-income and price-to-rent ratios.

“Canadian house prices, or at least some regional or local housing markets, notably those of Toronto and Vancouver may still reflect excess demand conditions,” says the Paris based OECD in their annual review of the Canadian economy.

According to data, the average price of a Canadian home is 5 times the average Canadian’s salary (net). This ratio is 35% higher than the long term average.

But the OECD was more concerned that Canadian’s may be overstretching themselves in the low-interest-rate environment. According to the report by 2012 some 7.5% of Canadians will be vulnerable to interest rate rises, unless household borrowing slows.

The report says: “High household indebtedness also implies a growing vulnerability to any future adverse shocks. Household credit growth needs to slow down!”

It’s a funny old tale; the Canadian housing market, which never boomed during the global housing boom, and then boomed during the global housing bust. The OECD explained their beliefs on why this happened.

“For one thing, Canadians entered the cycle with less debt than their U.S. counterparts. Secondly, they had access to a banking sector still willing to extend credit at favourable rates. And lastly, subprime mortgages never made up more than 5 per cent of new issues, compared with 33 per cent in the United States at the peak.”

Despite these realities the Canadian government acted quickly in introducing stimulatory measures to the housing market, which turned out to be far more than was needed (for the reasons given above). Low interest rates and other measures including a first time buyer tax credit caused house sales to soar and prices to grow massively, including a 24% increase in prices in 2009.

Fears quickly emerged that the market may be overheating, and that Canadian’s may be borrowing more than they would be able to afford when rates started to rise again. The government started to take measures to cool the market this year.

Sales saw a huge drop when the tax credit ended, and it emerged that the tax credit had caused people to bring their purchases forward leaving a lull in sales for months after it ended. And the government has also tightened the criteria for government insured mortgages twice. But the OECD believes they may need to do more.

OECD suggestions included: larger down payments on all federally insured mortgages and forcing banks to disclose how “sensitive” their mortgage revenues are to rate hikes.

“Lending standards and the framework for mortgage insurance are the right tools to contain this cycle,” says the OECD.

The Canadian Association of Accredited Mortgage Professionals, which represents brokers across the country, disagrees sternly with the OECD:

“We believe new mortgage insurance rules from Ottawa would be a solution looking for a problem,” says Jim Murphy, CEO and president of CAAMP. “The real estate is already cooling with sales down and prices that are stable.”

Murphy says the government has already tweaked mortgage regulations twice and there is “No need for a third time.”

The Canadian Real Estate Association has downgraded its growth forecast. This is no shock in the current climate, but what is shocking is that the CREA is now predicting that Canadian property prices will be falling again in 2011.

The Canadian property market shocked the many people who thought it would be infected by the US housing crash, by turning out to be one of the least affected markets in the world, and further, one of the few markets in the world to record strong house price growth in 2009.

That run though, CREA now says, peaked in the fourth quarter of last year, at which point things started to slow.

CREA now expects 490,600 sales through the Multiple Listing Service in 2010. While this is a 5.5% jump on last year, and the second-best year on record, sales are expected to fall by 8.5% in 2011.

“The revision reflects a weaker-than-expected start to the year in British Columbia, and recent developments that pulled forward the timing as to when sales are expected to ease in other provinces,” the group said in a statement.

The reason given for the revision is factors — namely government attempts at cooling the market — which have forced buyers to act quickly, bringing sales numbers forward and leaving bigger gaps behind them.

One such factor is the new mortgage rules enacted in April. The government said that from April 18th 2010, Canadians buying homes with mortgage default insurance on mortgages of less than 5 years would have to qualify based on the benchmark rate for a five-year fixed-rate closed mortgage.

This meant that borderline borrowers would get less cash for their homes, because they must qualify based on a rate that is 6% today. On mortgages of five years and over, buyers would qualify based on their contract rate, which is as low as 4.25% for a five-year mortgage based on discounting.

The rules would force many consumers out of variable rate mortgages tied to prime, which even after yesterday’s Bank of Canada rate hike, stood at 2.5%.

“The changes prompted some homebuyers to finance their home purchase before the new regulations took effect in April, which pulled forward a number of sales that would have otherwise taken place at a later date,” said CREA.

What’s more, the Bank of Canada finally increased its key interest rate on Tuesday (June 8). Some expect this to impact on the market, but not for a long time according to CREA:

“Interest rates are expected to rise slowly and at a measured pace during a new era of government spending restraint, so home financing will remain within reach for many homebuyers,” said Georges Pahud, CREA president.

CREA now says the market peaked in the fourth quarter of 2009 and predicts that the average price of homes sold through the MLS next year will be 2.2% lower than this year at $318,300. CREA now expects a growth of just 1.6% this year compared to 2009.

CREA’s earlier forecast was for a rise of 5.4% in 2009, but the lower sales activity in British Columbia, — including Vancouver, the country’s most expensive market — drove down the national numbers. In fact, only B.C. and Ontario are not expected to post price gains in 2011.

“With interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent prices increases and rising interest rates,” said Gregory Klump, chief economist with CREA. “A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. In keeping with the return of a balanced housing market and typical demand-driven housing market cycle dynamics, prices will remain stable.”

Mr. Klump emphasized that Canada’s mortgage market remains “solid,” and that conservative lending practices mean the country will not experience the same type of correction the United States has had where prices have fallen as much as 50% in some markets.