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Canada’s housing market sounding alarm bells

Canada’s home construction boon and soaring prices are raising concerns among some of the country’s economists and realtors.

“It is becoming somewhat worrisome that Canada is building more houses than we probably need. We’re building houses faster than warranted by the growth in the population and household formation,” Sal Guatieri, senior economist at Bank of Montreal, tells BNN.

He anticipates housing starts will cool down “dramatically” over the second half of 2012. He points to the recent pull back in sales as evidence of a looming slowdown, as the pace of home building often lags sales.

On Tuesday, the Canada Mortgage and Housing Corporation (CMHC) reported housing starts rose in June, while economists were expecting a drop.

Housing starts swelled to 222,700 units from the upwardly-revised number of 217,400 in May.

Mathieu Laberge, deputy chief economist at CMHC said the agency, “still expects the pace of housing starts to moderate as the year progresses."

Meanwhile, realtor Royal LePage says real estate is at a “tipping point.”

President Phil Soper says while home prices have increased for the past three years -- with the average price of a home rising 3.5 to 5.5 percent in the second quarter of 2012 from last year -- those gains can’t continue indefinitely.

"Confidence in Canada's real estate market is sound, but home prices cannot grow faster than salaries and the underlying economy indefinitely. Some regions have reached or perhaps even exceeded the current upper level of price resistance as buyers have embraced an era of historically low mortgage rates,” he says.

Guatieri agrees, adding that Canada’s housing market can’t continue to reach new heights, either in increasing prices or growing housing starts. He expects home prices to stabilize and possibly decline in high-priced regions like Vancouver and Toronto.

“I think people are taking a little more notice about the elevated prices in many of the cities, the fact that the mortgage rules will be tightening. And at some point, the interest rates will likely go up. Not for a long time, but at some point,” Guatieri says.

“So we are seeing buyers be a little more cautious. And at some point, we should see housing starts and construction pull back alongside the weakening in demand.”

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