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Economics Strategy - Charmaine Buskas, Senior Economics Strategist, October 18, 2007

The Canadian housing market has been a major driver in the economy thanks to the recent spate of historically low interest rates.  Even with tighter lending standards and higher rates, there are signs that the housing market may remain steady at least in the near term, suggesting continued support for economic growth.  The Bank of Canada recently kept rates on hold at 4.5% and is expected to remain on the sidelines for several more months.  Admittedly credit conditions are tightening, but households may still have some life left in it.  We expect price appreciation will slow from 10% to 7% in 2008.  Therefore Canadian home prices may continue to add to inflation pressures in the near term, but some of that pressure will abate by late 2008.

There are few worries of a disorderly unwind in activity as Canada's housing market has not seen the massive, unsustainable expansion that has occurred in the in the U.S.  There are certain regional pockets of activity in Canada where price appreciation has been exceptionally fast, and this raise some concerns that the correction prices in those areas could accelerate.  But the broad Canadian housing market is well balanced and continued low unemployment and healthy wage growth will underpin steady support for housing in the near term.