"What remains the greatest source of weakness in today's U.S. economy is a continued source of strength in Canada," says Warren Lovely of CIBC World Markets in a recent report. "While the U.S. housing market is mired in deep recession, Canada's own housing market has demonstrated extraordinary resilience."

This week the Canadian Real Estate Association (CREA) predicted that national home sales will rise to 8.1 per cent in 2007, setting an all-time sales record. Prices are also expected to go up by a whopping 10.4 per cent in 2007, with another 5.5 per cent increase in 2008.

"Resale housing activity was a juggernaut in the second quarter of 2007," says CREA's chief economist Gregory Klump. "Record breaking sales activity in the first and second quarters forced CREA to revise its forecast upward."

Although you'd expect the trade association to produce a rosy forecast, it's not much different that the latest prediction from the country's federal housing agency, Canada Mortgage and Housing Corp. (CMHC ). It's also expecting a new sales record in 2007, an increase of 6.5 per cent compared to 2006. CMHC says prices will increase by 9.9 per cent this year and 5.2 per cent in 2008.

Why is the Canadian housing market still so strong? The economic fundamentals that have carried this housing boom for several years continue to be in place. They include low interest rates, record-high employment rates, rising incomes and strong consumer confidence.

In addition, as we discussed in this space last April (Subprime Mortgage Crisis Not Likely to Spread to Canada ), Canadians do not have the same exposure in the subprime mortgage market that has come back to haunt U.S. home buyers.

However, the recent shocks to the stock market may change the Bank of Canada's plans to hike interest rates again in the near future. "One of the primary reasons the Bank of Canada started hiking interest rates again in the summer was the persistent power of the housing market," says Douglas Porter of BMO Capital Markets in a report. "The latest resale data again show precisely zero signs of a let-up. Absent the credit market turmoil, the Bank would surely be tightening again in September … but that's like saying absent John Wilkes Booth, Abe would surely have enjoyed the play. However, the strength in domestic demand shows why the Bank would be extremely reluctant to cut rates in the event of deeper trauma in the credit markets."

CMHC says that one, three and five-year posted mortgage rates will be in the 6 to 7, 6.25 to 7.25, and 6.50 to 7.50 per cent ranges respectively for the rest of this year and in 2008.

In analysing CREA's sales figures for July, Porter says that 17 of the 25 reporting cities posted double-digit sales gains compared to last year. "All cities west of Lake Superior reported double-digit price increases last month, led by the 53.7 per cent sprint in Saskatoon," he says. "However, the price surge is not confined to Western Canada, as Hamilton, Sudbury and Quebec City have also posted double-digit increases. Meanwhile, the previously white-hot Alberta markets are showing some signs of simmering down -- sales in both Calgary and Edmonton fell, while inventories climbed last month. In particular, while average prices in Edmonton are still up a whopping 38 per cent year-to -year, sales fell 21 per cent and new listings almost doubled. That combination points to a market headed for a correction."

Nonetheless, CREA's forecast calls for Alberta to end the year with prices averaging 24.6 per cent more than the end of 2006. It predicts a further 6.6 per cent increase for Alberta in 2008.

Prices are forecast to increase by 17.4 per cent in Saskatchewan, 11.2 per cent in Manitoba, 9.9 per cent in B.C., 9.2 per cent in Nova Scotia, and 8.6 per cent in Ontario this year.

The most robust sales activity this year has been in Saskatchewan, which CREA says will be up 33.7 per cent by year-end. Activity will be up by 15.8 per cent in New Brunswick, 13.9 per cent in PEI, and 10.8 per cent in Newfoundland.

The CMHC forecast says that in 2008, sales will slow and the number of new listings will rise, leading to a more balanced market across the country. It says job growth will slow and won't stimulate housing demand as much as in previous years. CMHC also predicts that mortgage rates and carrying costs will rise, which will ease housing demand from first-time buyers.