Canada's red hot housing market teeters on the brink

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Canada's overheated housing market continues to defy a U.S. style real estate crash, but even the most optimistic of investors are now bracing for pain ahead as prices continuing to rise and demand showing signs of tailing off.

National home sales were little changed on a month-over-month basis in July, according to statistics released on Thursday by The Canadian Real Estate Association (CREA). Inventory figures - another key measure of the balance between supply and demand - were also unchanged after standing above a ten-year average in July for about 70 percent of all local markets.

Whilst the CREA stated that the housing market has tightened but remains in "balanced territory", others aren't convinced.

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"We appear to be perched precariously at the peak," Adam Peterson, a residential real estate investor with New York firm JEN Partners told CNBC. "Prices are holding on, but inventory and land transaction indicators are telling a different story."

Jonathan Tepper, CEO of research firm Variant Perception told CNBC that ex-Bank of Canada Governor Mark Carney has played a part in one of "biggest housing bubbles in the world". Meanwhile David Rosenberg, chief economist and strategist at Canadian wealth firm Gluskin Sheff believes that the housing downturn has been rather orderly so far, but warns of weakness to come despite housing demand currently holding firm in many urban areas.

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House prices in Canada have doubled in the last ten years, according to the Teranet-National Bank Composite House Price Index. July's figure, released on Wednesday, showed overall prices rose 0.7 percent from a month earlier, the fifth straight monthly gain which pushed the index to a fresh all-time high.

Housing starts showed signs of a smooth landing with state-owned Canada Mortgage and Housing Corporation (CMHC) lowering its forecast for 2014 on Thursday to 186,600 units from an earlier estimate of 188,900 units. However, building permits last week showed a 12.9 percent drop in June, according to Statistics Canada, with permits for multi-family dwellings falling 18.8 percent.

"The sudden moderation in building permits is certainly not good news for Canadian housing which has been a focal point of many Canada-bears' attention," Rosenberg said in a note.

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While market watchers squabble over which indicator best describes whether Canadian real estate is cooling off or flashing red, lawmakers are addressing the risks. Last year, Finance Minister Jim Flaherty unveiled major changes to the limits of what the CMHC is allowed to insure, leading to a slight moderation in prices. Last week, the state lender also capped the amount of mortgage-backed securities sold by banks that it is willing to guarantee.

Stephen Poloz, successor to Mark Carney at the central bank, warned in the July monetary policy report that the most important domestic source of risk to the Canadian economy remains the possibility of a disorderly unwinding of household sector imbalances. Meanwhile, the ratio of credit market debt (such as mortgages) to disposable income continues to tread near all-time highs, according to Statistics Canada.

"I believe we're seeing the crash in slow motion, but the market has been so defiant that timing the correction is risky business," Peterson told CNBC. "A soft landing in home prices would require a truly unbelievable combination of artful policy making and the ability of consumers across the country to remain calm in the face of losing home equity while paying more."

Lawmakers are assertively forcing consumers and lenders to slow down the market, and therefore the developers and builders are moving quickly to halt projects and dump inventory, Peterson said.

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"The cycles last for years, and decisions made years ago come back to haunt us. I don't believe there is any silver bullet that can somehow fix the current predicament," he said.

Meanwhile, Andrew la Fleur, from Condos brokerage in Toronto told CNBC that there won't be a housing crash in the country as the market is healthy and has been self-correcting over the past year with help from the government.

"I am satisfied with the government's moves to date. they are exercising caution and encouraging Canadians to do the same. It has worked. Now after a year of moderation, Canadians are saying, 'OK, let's get back into our favorite national pastime: buying real estate'," he said.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81