CALGARY - House prices are rising faster than economic fundamentals warrant and could decline with a housing “bubble” developing but not a “bust,” says Edward Jones in a report released today.

“Canada’s housing market escaped the recent severe downturns in the U.S. and other countries,” said the report authored by Kate Warne and Craig Fehr. “However, today’s conditions in Canada share some characteristics of those countries prior to their downturns, leading us to take a cautious stance on housing investments.

“We also believe Canadian investors should prepare for the possible impact of a housing downturn on the economy.”

The investment firm in its report said a bubble usually has three conditions - prices rising sharply and are too high based on historical data; credit is too easy to obtain; and lax regulation or innovations make regulation less effective.

“We think the first two conditions characterize the current Canadian housing market. To avoid the third condition, the government is taking steps to tighten mortgage availability, and regulation remains relatively tight,” said the report. “While we believe any housing downturn won’t be as severe as the recent U.S. experience, the increasing likelihood of a cooling housing market still poses some risks for investors who are not well-diversified.”

The report said the worries about the Canadian housing bubble can be traced to a sharp rise in Canadian home prices with the average resale price across the country rising by 19.3 per cent in 2009 to $337,410.

Low interest rates and easy terms for mortgages has resulted in the growth in residential mortgage credit rising above 10 per cent annually from 2006 to 2008 which was more than double its growth rate from 1997 to 2001.

New regulations to mortgage lending which came into effect April 19 will “temper demand for housing,” added the report.

Edward Jones said housing prices have outpaced the overall economy and several factors have the potential to reduce demand and cool the housing market including tighter lending standards, rising interest rates and mortgage costs, high levels of consumer debt and new supply accelerating.