Low interest rates and a strong economy have moved a lot of Canadians into their dream homes during the last few years -- and especially in 2002, when more resale homes were sold than ever before, and new home starts hit a 13-year high. But with a shaky U.S. economy and fear of a war with Iraq, can Canadian consumer confidence hold up for another good year in 2004?

The consensus is that 2003 won't be as strong as last year, but that sales and prices should remain strong. The economic fundamentals that have been driving the market all along are low interest rates, strong employment and income, and pent-up demand because of a low inventory of homes.

Royal LePage is predicting that the average resale house price will rise by 4.5 per cent, to $194,500, but that the number of sales will decline by three per cent. In a forecast at the end of November, Century 21 Canada suggested that the number of units sold would drop even more, by 10 per cent to 15 per cent, with price increases matching the inflation rate.

"I'm not suggesting that the bubble will burst, because there's been no bubble in the Canadian real estate market," said Don Lawby, president and COO of Century 21 Canada. "We will have a healthy market, but there will be no more talk of real estate leading the economic recovery."

In the forecast, Lawby said that after three years of low interest rates driving the market, most people who are interested in buying have done so.

"With few exceptions, there's no reason why anyone who could accumulate a deposit and find a house that they liked did not buy a home in the past three years," he said. "Most of them locked into low interest rates for fairly long terms, so they are reasonably well protected against unforeseen changes in economic conditions."

Sherry Chris, executive vice-president, network services for Royal LePage, says demand for real estate will remain strong across Canada during the first quarter of 2003. "However, home buyers in Calgary, Edmonton, Ottawa, and St. John's, for example, are becoming much more price sensitive and are unwilling to pay what they would have six months ago," she says. "This trend may expand across other markets in 2003."

Chris says escalating property values are pricing some first-time buyers out of the single-family home market. "This has resulted in booming condominium activity, most notably in markets where the condo lifestyle was less acceptable a few years ago," she says. "This trend is most evident in areas in Vancouver, Edmonton, Calgary and Ottawa.

In Toronto, where about 50 per cent of Canada's 250,000 immigrants settled last year, the resale and new home markets both had record years in 2002. Canada Mortgage and Housing Corp. says that activity will slow down somewhat in 2003, but that resale prices will rise another five per cent by the end of the year.

Lawby says there's a growing trend that buyers carry larger mortgages with higher monthly payments and shorter amortization periods. "After the stock market crashed, people started paying more attention to their homes as long-term assets in which they could invest by paying off their mortgage loans sooner," he says.

The TD Bank Financial Group's quarterly economist forecast says that Canadians currently have more household debt than at any time in history. But the economists say that as long as interest rates do not rise dramatically, most households won't have any trouble meeting their financial obligations. TD Economics says that short-term interest rates will rise by 125 basis points in 2003 and 150 points in 2004, which it says should be covered by consumers' continuing growth in disposable income. The economists say the Bank of Canada will probably start raising rates in June.

Economic forecasts always carry the risk of unforeseen developments, and the possibility of a military conflict between the U.S. and Iraq continues to cause economic uncertainty. Other risks to Canadian forecasts are that earnings and job growth could slow down in 2003, or that the number of listings on the market could rise faster than expected, which would slow price escalation.

Published: January 2, 2003

Use of this article without permission is a violation of federal copyright laws.

Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .