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Could Canada be on course for a soft landing?

Tags: Real Estate

With the Canadian Real Estate Association (CREA) hiking its forecast for home sales and prices, economists say calls for a "hard landing" in Canada's housing market are increasingly looking off the mark.

The association, which represents realtors across the country, reported on Monday a 3.6-percent jump in May homes sales from April, the largest month-over-month increase in nearly two years. Yet home sales are still 2.6 percent lower than they were a year ago.

This has prompted CREA to ratchet up its 2013 sales estimates to 443,400 homes, still 2.5 percent lower than its last year's estimate.

TD economist Dina Ignjatovic says the latest data is more evidence that the Canadian real estate market is not headed for a hard landing, where home values would fall dramatically.

"It just goes to show our expectations for the impact of the mortgage insurance tightening rules are starting to wane," she says. "We do see a stabilization in home sales going forward, but overall still a soft landing in the Canadian housing market [meaning] we aren't expecting to see a huge correction in sales or prices."

So far prices in most markets have yet to fall, says Ignjatovic predicting "a fairly stable hosing market over the next 12-8 months."

BMO chief economist adds that the housing crash, which some commentators have been predicting for years, may simply not happen.

"Sorry to inform you, but 'The Great Real Estate Crash of 2011…no…2012…no…2013' has been postponed until 2014, or until further notice," he says in a note to clients. "More seriously, we believe housing remains on track for a fabled soft landing."

However, Canada's hottest sectors, especially the condo market in Toronto and Vancouver, have been the target of particular concern, as they have experienced the largest run-up in prices and a surge in construction.

"There's, of course, a lot more risk to these markets," Ignjatovic says. "We do expect to see larger price declines in these markets, but not sharp contractions."

Canada's housing market has been a large driver of economic growth in the wake of the financial crisis - in sharp contrast to other developed economies such as the United States where plunging home prices and a sharp pullback in construction weighed on the economy.

"Construction does contribute to our GDP," Ignjatovic says. "This year, unfortunately, we're going to see a pullback in housing starts numbers and that will weigh on overall economic growth of Canada, but that's because we've seen such a big shoot up in building, above the demographic fundamentals of Canada."

Ignjatovic doesn't expect the federal government to push new mortgage tightening initiatives to keep the market in check.

"From the numbers we've seen in the housing market, the government is happy with where things are," she says. "We've seen price growth declined about 2 percent, which is more in line with income growth [so] unless we see a lot of froth building in the market, we probably won't see too much [government] action."

Last summer Ottawa put in place tougher mortgage rules in order to slow the country's booming housing market. Finance Minister Jim Flaherty highlighted the condo market in Toronto as a particular area where real estate had become overheated.

Banks started raising longer-term mortgage interest rates last month, a move that may further slow the housing market.

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