While the U.S. housing market stumbles, there is no sign of a break in Canadian house construction, sales or prices quite yet, the latest figures show. 

In a report on Wednesday, Bank of Nova Scotia economist Adrienne Warren called the Canadian market "the rabbit that just keeps on going and going."

'The trend in national new- and existing-home prices, while off the heights of last year, is still averaging about 10 per cent year-over-year.' —Adrienne Warren

Although a slowdown is likely by the end of the year, home resales set a record in January and housing starts hit a 29-month high with the assistance of mild weather, Warren said.

Prices are good, too, she said. "The trend in national new- and existing-home prices, while off the highs of last spring, is still averaging about 10 per cent year-over-year."

Warren, who delivered her report at a Toronto forum organized by the bank, was not alone in her enthusiasm.

Phil Soper, president of Royal LePage Real Estate Services said the housing market was "quick out of the gate this year," propelled by such factors as moderate interest rates, high employment and strong consumer confidence.We expect that this resilient market will continue throughout 2007," he said.

Subprime lending collapse in U.S.

In the background was the U.S. market, sobered by a collapse in what is called subprime lending, the mortgage-industry equivalent of junk bonds.

Subprime and sometimes interest-only loans — made to people with bad credit and little hope of keeping their homes if interest rates were to rise — were jet fuel to the market for years. Now lenders have begun to go bankrupt as borrowers default.

"The buoyancy of Canada’s housing market is particularly impressive in light of the marked slowdown underway south of the border," Warren said.

"U.S. housing starts and resale volumes have fallen roughly 25 per cent and 10 per cent, respectively, over the past year. Average prices have flattened since mid-2006, and are posting significant declines in many of the previously heated markets in the western and southern states."

Softening seen as inevitable

Canada is unlikely to follow that path in 2007, she said, arguing that "speculative investing has been less active, overbuilding less prevalent and high risk lending less widespread" than in the United States.

"A consistently strong domestic job market and historically low mortgage rates are sufficient to maintain at least some forward momentum."

Even so, a softening seems inevitable so late in the housing-market cycle, she said.

"Housing affordability has been eroded by the steady run-up in prices since the start of the decade, and pent-up demand largely absorbed. At the same time, a growing inventory of unsold new homes, rising labour and material costs and better balanced resale markets have trimmed builders' profit margins.

"We anticipate a drop of roughly 10 per cent in home sales and housing starts this year and national average price increase in the mid-single digits."

Bank of Canada says economy 'on line and leaves interest rate at 4.25 per

Tue Mar 6, 2:20 PM

By John Ward\Yahoo News

OTTAWA (CP) - The Bank of Canada left its key overnight interest rate unchanged at 4.25 per cent Tuesday and said the economy is developing as predicted.

The stand-pat decision was widely expected, but it may have helped prod investors as the Toronto stock market was up 100 points after the announcement. The central bank last changed the trend-setting rate in May, when it nudged it up a quarter-point. The bank said it's satisfied that the economy is in line with the expectations it outlined in its monetary policy update in January..

"The Canadian economy is expected to continue to operate near its production capacity through 2007 and 2008," the bank said in its announcement.

"Total CPI inflation should average just above one per cent in the first half of 2007, returning to the two per cent target in 2008. Core inflation should remain near two per cent throughout this period."

The bank said risks to its inflation projections are evenly balanced.

The next scheduled rate-setting date is April 24, with the bank issuing its next monetary policy report two days later.

Analysts had mixed outlooks after the announcement, with some expecting a rate cut later this year and others looking for an increase in 2008.

"We expect the Bank of Canada to hold the policy rate steady in 2007, but rate hikes are likely in second half of 2008," said Dawn Desjardins, senior economist at Royal Bank.

"Our forecast that the economy will grow at or slightly above its potential pace in 2007 and 2008 sets up for the bank to swing into rate-hike mode in the second half of next year. We are forecasting that, after holding the overnight rate at 4.25 per cent in 2007, the bank will raise it to five per cent by the end of 2008."

David Tulk, an economist with TD Bank, agreed that an expectation of domestic strength will keep the central bank on hold for the rest of 2007, but said a cut could come if weaker economic growth is accompanied by a slower pace of job creation.

Carolyn Kwan of Scotia Capital said the bank may be happy with the state of things now, but will be watching developments closely.

"The issue going forward is really whether the outlook as they have laid it out is going to be sustained through this year," she said. "We have a slightly different viewpoint. We don't think that the momentum is going to hold up, especially from the U.S. consumer."

As well, she said, there are signs of weakening in U.S. business investment, which some had expected to offset weaker consumer spending.

"I think our outlook diverges even more, relative to some of our peers on the Street. We are calling for a bit of a weaker outlook for the summer and expecting the central banks both in Canada and the U.S. actually to be cutting rates in September."