A new report from Moody’s Analytics says Canada’s two priciest markets could eventually be dragged down by housing results in the rest of the country.

The report released Friday notes Toronto house prices are up 10.3% from a year ago while Vancouver prices are up 16.3% in the same period. Meanwhile the Brookfield House Price index for the entire country is up just under 5% while Statistics Canada’s New House Price Index is growing at just under 2%.

“Housing gains have been markedly slower in the other Canadian metro areas, particularly in the Prairie provinces, and growth has moderated further in recent months,” writes Alexander Lowy, an associate economist at Moody’s Analytics which is a division of Moody’s Corp.

The economist says two factors may bring the housing market’s “white-hot streak to a screeching halt” and predicts a softening of household demand over the coming years.

Moody’s Analytics says the bifurcation in the market could work against the overall Canadian housing market at some point.

“This split will make it difficult to manage the market in the event of adverse shocks, and a continued slowdown in smaller metro areas could eventually drag down the overall market,” says the report.

Lowy also predicts rising interest rates will take a bite out of the Canadian housing market. “Mortgage rates will almost certainly rise by the end of the year as the U.S. Federal Reserve continues its rate hikes, driving up longer-term government bond yields in the US and Canada through 2016,” he writes, adding the expectations of higher rates may giving the market “artificial strength” as buyers and sellers rush to secure deals with attractive financing.

Eventually, all the activity that has been pushed forward could result in a quicker drop in demand than anticipated, if rates begin to climb in a dramatic way.

The economist thinks Canada’s central bank is eventually going to have no way to go but up, when it comes to its key overnight lending rate.

“The Bank of Canada’s low interest rate policies may help prop up house prices this year, but even Canadian policy rate tightening is inevitable. This could price many new borrowers out of the market and increase the risks for those faced with rolling over existing mortgage debt or attempting to draw equity out of their homes. The result will likely be a softening of household demand over the coming years,” said Lowy.

“White-Hot” Vancouver, Toronto Housing Markets Could be Dragged Down by Rest of Canada by Garry Marr | Financial Post