The Toronto Real Estate Board (TREB) says 2006 began with a bang in the local real estate market, with activity up 10 per cent compared to 2005. In Calgary, January sales are 48 per cent higher than last year. Although national figures are not yet available, it appears Canada's real estate market still has a lot of strength.

"This is a very encouraging performance for this time of year," says TREB President John Meehan. "Last year finished as a record, so to be ahead of that pace early on shows that the market has a lot of stability heading into the busier spring months."

Canada's existing homes market has set new sales records for five consecutive years, but Canada Mortgage and Housing Corp. (CMHC) says that streak will end this year. The federal housing agency predicts that sales will drop from 481,900 in 2005 to 461,500 this year and 444,000 in 2007.

"Four consecutive years of strong price growth combined with rising mortgage rates in 2006 and 2007 will cause demand for existing homes to ease below last year's record-setting pace," says CMHC's National Housing Outlook. "An increasing number of new listings will give existing home buyers more choice, thereby moving the existing home market toward more balanced conditions."

Despite Toronto's fast start, CMHC Senior Market Analyst Jason Mercer says the January results are in line with the forecast. But in Toronto, he says, "Existing home sales will remain near record levels this year. Steady employment growth, in-migration and low borrowing costs will continue to fuel strong ownership demand going forward."

Mercer says, "It's very early yet, but strong figures to start off the year can set the tone for the ensuing months. It's a very good time to be in the market."

Across the country, CMHC predicts sales will drop in all provinces except for Manitoba and Saskatchewan, where "a positive mix of economic and demographic" factors will boost the resale market.

The average price of a home in Canada is expected to rise by 5.5 per cent this year, to $262,700. In 2007, CMHC predicts another price increase of 3.8 per cent. "Moderating sales activity and an increase in the number of new listings will result in an easing of price pressures in 2006 with many major centres' resale markets moving into more balanced conditions," says CMHC.

While buyers who are already homeowners "have a degree of protection from rising house prices because price gains are reflected in increases in their home equity," CMHC says first-time home buyers will feel the greatest impact of rising house prices. It says that while mortgage costs have been rising, there has been little increase in rental rates in many urban centres. That may encourage some first-time buyers to stick to renting for now.

The outlook for new homes is not as bright. New home construction will fall in the next two years, says CMHC. Pent-up demand, which had been building during the 1990s, has been eroding steadily since 2002 as the pace of new home construction outstripped long-term demographic demand. Increased competition from more listings in the existing homes market will also slow down new home construction.

The National Housing Outlook predicts that housing starts will decline by 7.4 per cent in 2006, and another 6.7 per cent in 2007.

The Bank of Canada's target for the overnight interest rate rose by a quarter-point to 3.5 per cent on January 24. CMHC says it expects three additional 25 basis point hikes in 2006, to bring the target to 4.25 per cent by year-end. "Mortgage rates will remain low, rising moderately in 2006," says the agency. "Tame inflation and a strong Canadian dollar vis-à-vis the U.S. dollar will restrain the size and speed of Canadian interest and mortgage rate increases."

Consumer confidence, after taking a hit in September when fuel costs rose following the hurricanes, has rebounded and CMHC expects consumer spending to strengthen. Employment is forecast to grow by 1.7 per cent this year and 1.4 per cent in 2007, and the unemployment rate is expected to fall to 6.6 per cent in 2006.

CMHC's Housing Market Outlook, formerly available by paid subscription, is now offered as a free download at the CMHC website .