TORONTO - A recent spike in house prices won't likely continue despite ultra-low interest rates and experts believe the housing market will remain relatively healthy with demand for Canadian homes falling slightly in the months ahead.

A Royal LePage House Price Survey and Market Survey Forecast released Wednesday found home prices unexpectedly rose between 5.7 and 7.8 per cent in the third quarter. But it also warned that the Canadian average price was driven higher by expensive cities like Vancouver and Toronto, overshadowing the fact that price increases slowed and values even fell in some areas.

"There's little to provide much lift to the housing market, but there's not much to drag it down either," said Bank of Montreal senior economist Benjamin Reitzes.

Reitzes believes that the current values of Canadian homes can't be sustained. That's because a prolonged low interest rate environment has already spurred an influx of demand in the housing market and many Canadians have already accrued too much debt during and since the recession.

Interest rates can't fall much lower than the present one per cent and a real jump in job growth that would encourage home upgrades isn't likely to happen in the next year or two, he added.

In the third quarter of 2011, the national average price of a detached bungalow rose 7.8 per cent year-over-year to $349,974, while standard two-storey homes rose 7.7 per cent to $388,218 and standard condominiums rose 5.7 per cent to $239,300.

The price appreciation appears particularly robust because it is compared on a year-over-year basis to a very weak third quarter in 2010. Still, the strong pricing environment has lasted longer than many industry observers predicted.

"A resilient domestic economy coupled with the stimulative effect of ultra low interest rates has extended the post-recession bounce in house prices, but there is evidence of overshooting in some markets," said Phil Soper, president and chief executive of Royal LePage Real Estate Services.

A weak outlook for the global economy means interest rates are expected to remain low for longer, which is good news for homeowners with mortgages and consumers financing loans and lines of credit.

The Bank of Montreal has predicted that interest rates -- which affect variable rate mortgages and other loans tied to banks' prime rates -- are unlikely to rise again until the early part of 2013. That's about six months later than earlier forecasts that rates would stay flat until the fall of 2012.

In fact, the bank said there is a good chance the central bank will cut rates over the next six months -- by close to half a point.

Some analysts have suggested that real estate is actually looking like a safer investment than stocks or bonds during the current global economic uncertainty -- and that too has been helping to support the market.

But interest rates have been low for more than two years and much of the demand from home buyers has already been exhausted, which is why a slowdown could still be on the horizon regardless of the stimulative environment, Reitzes said.

"I don't know if low rates are going to push people to jump in, you've probably already got a lot of that," he said.

"But it will keep prices from coming down... it's going to provide underlying support, so even though the economy is not growing very strongly, housing could remain relatively healthy and sales could stay flat or decline slightly."

That's because home buyers can afford to take on a bigger mortgage with monthly payments the same as they would be with a smaller mortgage and higher interest rates.

"They say: 'the difference in price for me, if its $50,000 is $200 or $300 dollars as month, that's not a big deal for me, I'm happy to do that'."

For example, the monthly cost of carrying a five-year $300,000 mortgage for 30 years at a three per cent variable rate would be $1,264.81. In 2007, when the housing market was in a pre-recession boom and five-year variable rates were as high as six per cent, that mortgage would cost 30 per cent higher each month, at $1,798.65.

Some economists have warned that a major correction in Canada's housing market -- even a U.S. style crash -- is possible.

In the U.S. the country's depressed housing market is still trying to get back on track after taking a huge dive in 2009 amid the widespread mortgage and foreclosure crisis.

Home values have been driven up by the psychology that prices will continue to increase, but that is at odds with the fact that household incomes are stagnant and consumer confidence is waning.

But many economists say Canadian prices are likely to flatten over the next few years, rather than undergo a dramatic drop.

"Although some commentators are predicting that the sky will fall on the Canadian housing market in a US-style implosion, we lack the structural conditions that precipitated the housing crash in the United States six years ago," Soper said.

Canadian home prices varied widely in the third quarter, depending on the local market. For instance, detached bungalows in Vancouver had an average price of about $1 million -- nearly three times the national average.

The Canadian national price of a standard two-storey detached home rose 7.7 per cent to $388,218 and the price of a standard condominium 5.7 per cent to $239,300.

In Vancouver, usually the country's most expensive real-estate market, the average price for a two-storey homes was $1.14 million and condos were going for about $513,500.

The report highlighted both Calgary and Edmonton as regions where prices were relatively flat year-over-year.

In Toronto, prices were up for all housing types surveyed. The average price for detached bungalows was $518,433, up 9.4 per cent from a year earlier. Standard two-storey homes were up 7.6 per cent from a year earlier to $620,862.

In Atlantic Canada both Halifax surged ahead with the price of standard condominiums increasing 10.4 per cent.

14:45ET 05-10-11