But prices are forecast to drop five per cent in 2011 to $370,000 before rebounding three per cent in 2012 to $380,000. The gains in 2010 largely reflect higher prices and sales activity earlier in the year.

A separate report by CIBC World Markets Inc. says Canadian home prices are overvalued by about 12 per cent, largely because of inflated prices in B.C. where prices are 16.8 per cent overvalued. A CIBC economist says the province is due for a price correction.

The CIBC report states that the housing sector "looks vulnerable" in the west.

"Granted, no part of Canada looks to be immune to further housing market weakness, with significant momentum having been more recently lost," economist Warren Lovely said in the CIBC report. "But it's in B.C. and Alberta where housing prices have overshot fair market value by the largest margin, with an ongoing correction expected to dull residential construction activity and blunt consumer enthusiasm."

The information is contained in a larger report that states the end of government stimulus, the continued reluctance of U.S. consumers to spend and a softening of the Canadian housing market will see real GDP growth fall well below federal and provincial government forecasts for 2011.

Of B.C.'s overvalued home prices, CIBC deputy chief economist Benjamin Tal said in an interview that he believes B.C. prices could drop 10 per cent over the next year - possibly more in Metro Vancouver where prices are so much higher - before settling down.

"The housing market in Canada is overshooting itself.," said Tal. "It's not a crash. It's an adjustment. There are no preconditions for a crash."

After the adjustment, he said, the B.C. market could be subdued for several years, rising with inflation, "probably two to three per cent a year."

According to the Central 1 report, the downward trend in housing sales that has characterized much of 2010 will stabilize in the fourth quarter of this year before trending higher in 2011 and 2012, a release stated.

Residential transactions will fall seven per cent from 2009 levels to 93,000 units before rising by five per cent to 98,000 units in 2011 and nine per cent to 107,000 units in 2012.

"A weak sales environment and elevated inventory levels have led to downward pressure on prices in 2010 and those declines will persist into early 2011," Central 1 economist Bryan Yu said in a statement. "Lower prices and attractive mortgage rates will be a powerful incentive in attracting an increased number of buyers to the market next year."

The Central 1 report noted that after a 54-per-cent rebound in 2010, housing starts are forecast to rise three per cent to 25,500 units in 2011. However, new construction will remain low compared to pre-recession highs when starts ranged between 34,000 to 40,000 units.

On a regional basis, housing sales will remain concentrated in the larger metro areas of Vancouver and Victoria, the Central 1 report said.

However, regions with a larger secondary home market and recreational properties experienced a softer post-recession housing market rebound and will continue to experience a slow market recovery.

For Metro Vancouver, prices are forecast to rise eight per cent in 2010 to $460,000, before dropping five per cent in 2011 to $436,000 and then rising three per cent in 2012 to $450,000, according to Central 1.

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