OTTAWA -- Canada's hot real estate market continued to gather steam last month, but a new report from a respected mortgage and housing expert makes the case that prices are not in bubble territory and, if anything, have room to grow.

The report by Toronto-based analyst Will Dunning stands conventional wisdom on its head as related to the Canadian housing market, which almost every think-tank and economist believes is overheated and headed for a fall, whether by way of a soft landing or crash.

But Dunning, of Will Dunning Inc. economic research, says based on current interest rates, which likely won't move higher for some time, and the stable labour market, the housing market is perfectly aligned with fundamentals.

In fact, he says if there is a correction, it will most likely be federal Finance Minister Jim Flaherty's tightening of mortgage rules -- rather than inflated prices -- that will be the catalyst.

"The deliberate reduction of housing demand, which is now clearly visible in the new and existing arenas, creates a risk that prices could fall, unnecessarily," he said. "Once prices start to fall, the outcome is unpredictable."

The paper was released Wednesday on the same day the Teranet-National Bank composite price index rose to a new all-time high, showing home prices in Canada increased 0.3 per cent in February.

Last year, the OECD declared Canada's housing market the "most over-valued" in the world after noting that the price-to-rent ratio -- which compares the total cost of ownership against renting a similar property -- had ballooned to 88 per cent above the historic average.

Dunning says the problem with the assessment is that the Paris-based organization used faulty data to reach its conclusion on both the price and rent side.

The biggest distortion came from using Statistics Canada data on rent increases rather than the more accurate figures, for the purposes used, produced by the Canadian Mortgage and Housing Corp. The latter's survey found rent costs increasing almost at twice the rate of Statistics Canada -- 2.4 per cent annually since 2009 as opposed to 1.3 per cent.

"The result is that there is room to accommodate a sizable increase in house prices (as much as 20 per cent to 25 per cent during the next two years), and/or rises in interest rates (of) as much as one percentage point," he argues.

"Thus, rather than being overvalued, house prices in Canada are fairly valued, and they may even be undervalued."

In an interview, Dunning said the numbers apply to the Canadian average and that some markets, particularly Vancouver, don't have room to rise without getting out of whack with fundamentals.

Still, housing bear David Madani of Capital Economics, who has been forecasting a correction of about 25 per cent in terms of prices, said it is absurd to talk of an undervalued housing market in the Canadian context.

And he praised, rather than criticized Flaherty for intervening to dampen demand, noting that reducing the amortization period to 25 years and setting a minimum down payment requirement merely returns Canada to the conditions that existed before the recent run-up.

But CIBC deputy chief economist Benjamin Tal, who has written extensively on the real estate market, agrees with some of Dunning's conclusions, particularly on the price-to-rent ratio that the OECD had used to reach its alarmist assessment. He still believes housing is somewhat overheated in Canada, however.

"I do believe we have overshot, the only question is the nature of the correction," Tal said.

Unless there is a sudden trigger, such a recession and large job losses, Tal says home prices could drop 10 per cent on average over the next few years, then have a period when they do not change at all, as happened in the 1990s.

But Dunning says if there is a correction, it will be the result of Ottawa's meddling, particularly the July 2012 measure to reduce amortization periods to 25 years on government-backed mortgages.

That had the same effect as if mortgage interest rates were hiked by one percentage point, he said, and succeeded in slowing construction of new homes. "I don't think that's played out yet," he said.