Canadians have binged on low interest rates by loading up on household debt, pushing up home prices to levels that are now “moderately overvalued,” say economists.

Average housing prices are about 11 per cent overvalued, but the market is not experiencing a “bubble” and is unlikely to suffer a U.S.-style collapse, says a report by the Bank of Montreal released Monday.

The estimate came as a separate report Monday noted that the volume of residential mortgages passed the $1 trillion mark for the first time this year, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP).

“After doubling in the past decade, prices are now adjusting lower in response to less pent up demand and relatively high household debt,” said economists Earl Sweet and Sal Guatieri.

Debt remains an issue in the housing market, even as some banks decided to drop mortgage rates further on Monday.

Over the past 15 years, Canadians have been borrowing more to buy homes, at a growth rate of 7.5 per cent a year according to the CAAMP report. Low interest rates have encouraged many Canadians to take the plunge, pushing up prices.

“A comparison of house prices with personal income suggests that Canada’s housing market is moderately overvalued,” said the Bank of Montreal. “Unlike in the past decade, housing will probably not act as a tailwind for the economy and investors seeking continued strong returns might want to look elsewhere.”

An earlier report by The Economist magazine, comparing house prices to rents, said that Canadian house prices were overvalued by as much as 24 per cent. BMO said that comparing house prices to incomes is more realistic, since it argues that incomes ultimately determine how much house you can afford.

The bank said the U.S. housing market was driven by a “major deterioration” in housing standards, which is not the case with Canada.

“Though overpriced, the absence of widespread speculation and egregiously loose lending standards suggests the market is not in a bubble.”

On the subject of debt, a survey released by CAAMP Monday shows that a high percentage of Canadians (7.87 out of a scale of 10) agree that low interest rates have meant that many people became homeowners “who should probably not be homeowners.”

On the other hand, among Canadians who have mortgages, some may be burying their heads in the sand, since few agree they have taken on too much debt.

This disconnect suggests that there is a strong perception that “many people, but just not me” have too much debt, said author Will Dunning.

Meanwhile, home buying intentions continue to deteriorate, with fewer Canadians agreeing that now is a good time to buy a home in their community.

“The responses suggest that the recent slowdown in home buying activity might persist,” said economist Dunning.

Developers have certainly caught on to that idea.

Housing starts in Ontario dropped by 24.5 per cent in October over September according to seasonally adjusted and annualized figures also released Monday by the Canada Mortgage and Housing Corp.

An estimated 41,300 residential units broke ground, down from a revised 54,700 units in September. Both multi-unit, which includes condos and apartments and single detached construction were down.

“Slower job growth, fewer first time buyers and adequate supply of housing in resale markets will temper increases in new home starts,” said Ted Tsiakopoulos, CMHC regional economist.

About half of Ontario urban centres posted decreases from the same month one year ago. But for the year, Ontario construction is still 19 per cent above levels for 2009, largely on the strength of the first half of the year.

“Housing demand has cooled significantly this year and supply now seems to be following,” said BMO Capital Markets economist Robert Kavcic.

In the key Toronto market, starts were down by 35 per cent in October, thanks largely to a drop in condo building. But that is not expected to last long, as there is still a backlog of projects to be built.

A start is recorded when the concrete foundations of a building are poured.

“The relatively low number of high rise units starting construction last month is a divergence from recent activity,” said Shaun Hildebrand, CMHC senior market analyst. “The popularity of condos in Toronto will push starts for this type of housing higher in the months ahead.”

Canada wide, starts decreased by 9.2 per cent in October over September.

Atlantic Canada was the biggest gainer, with an increase of 32.9 per cent in starts