(Adds economist comment, regional details)
By Andrea Hopkins
OTTAWA, Oct 26 (Reuters) - There is strong evidence that many Canadian housing markets are overvalued, the federal housing agency said on Wednesday, but it tempered the warning with a forecast projecting cooler housing starts, sales and prices in 2017 and 2018.
It was the first time the Canada Mortgage and Housing Corp acknowledged problems in Canada's overall housing market despite years of warnings from analysts about a potential bubble and repeated moves by government to tighten mortgage lending rules.
"We now see strong evidence of problematic conditions overall nationally. This is fueled by overvaluation - meaning house prices remain higher than the level of personal disposable income, population growth and other fundamentals would support," CMHC Chief Economist Bob Dugan said in the report.
But the agency, which is also responsible for insuring the bulk of Canadian mortgages issued by banks and other big lenders, said the high prices and overbuilding should dampen future growth in prices and homebuilding.
The head of the CMHC Evan Siddall warned last week that the agency would raise its overall risk rating for the national housing market to "strong" for the first time because affordability concerns have spread beyond the two most expensive markets, Toronto and Vancouver.
It had previously warned about overvaluation and overbuilding in several cities, but never the Canadian market as a whole.
The government in October tightened mortgage and tax rules in a bid to prevent homebuyers from taking on too much debt and to make foreign investment harder, the latest attempt by policymakers to prevent a U.S.-style housing crash after the boom.
In its quarterly report, the CMHC said the two hottest cities, Toronto and Vancouver, should cool in 2017 or 2018, in part due to rising mortgage rates and high prices and, in the case of Vancouver, a tax on foreign homebuyers that took effect in August.
Canadian home prices were up 11 percent in the second quarter from a year earlier, driven by a 15 percent gain in Vancouver and a 13 percent rise in Toronto, the agency said. Excluding the two cities, home prices decreased 3 percent in the quarter.
It said housing construction is expected to decline slightly in 2016 and 2017 to levels "more consistent with economic and demographic fundamentals" before stabilizing in 2018. Sales of existing homes will decline in 2017 and level off in 2018, while the pace of price gains will cool in 2017 and 2018.
Reporting by Andrea Hopkins; Editing by Meredith Mazzilli and Tom Brown