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OTTAWA — The Canadian housing market in 2012 will be a “tug-of-war,” with low interest rates hauling hard on one end of the rope, and economic uncertainty joining forces with slow income and employment growth to pull back on the other, according to a report from TD Economics.

The report suggests Calgary and Edmonton will come out on the winning side, while price corrections will sap the strength of the powerhouse markets in Toronto and Vancouver.

Housing sales grew in 2011 by 2.2%, according to the report by economist Sonya Gulati, and prices rose by an estimated 7.5% — though once the overheated condo markets in Vancouver and Toronto were removed from the equation the overall price gains were much more muted.

“Looking ahead, we anticipate a tug-of-war action to take hold in the Canadian real estate market,” Ms. Gulati said in the report. “At one end of the rope is the magnetism of low interest rates; at the other are subdued prospects for economic, income and employment growth. Ultimately, we expect the economic side of the equation to win out over the near-term.”

Economic factors will be influenced in the first half of 2012 at least by continuing global financial turbulence, and while that’s expected to die down in the second half of the year, renewed economic strength in 2013 will likely come with higher interest rates, which will reduce housing affordability.

Accordingly, sales are expected to fall by 2.4% next year and 3.5% in 2013, while prices will suffer average declines of 1.9% in 2012 and 3.6% in 2013, Ms. Gulati says.

TD estimates prices are over-valued 10 to 15%, though that is expected to drop over the forecast period.

“Economic, income and employment drivers no longer support the pace of activity and price gains we witnessed in the early phases of the recovery,” the report said. “Our current forecast points to a gradual unwinding of over-valuation, but more turbulence in Europe, the U.S., or even here at home, may speed up the period over which the excesses are evaporated.”

The report breaks down the housing price, sales and starts forecasts for 12 cities across the country.

“Among the 12 major markets profiled in this report, Calgary and Edmonton ought to lead the pack,” Ms. Gulati writes. “Solid economic fundamentals and the absence of a recent run-up in prices support our call. Toronto and Vancouver do not appear to be as lucky —we have them experiencing a greater-than-average correction in both sales and prices over the next two years.”

Surprisingly, Saint John, which will record its fourth consecutive year of sales declines in 2011, is expected to see the best overall outcome for the period.

“Slightly better lumber prices and an increase in U.S. consumer demand support an improved job climate,” Ms. Gulati said. “As a result, the employment growth rebound on tap for 2012 and 2013 within Saint John, and the unemployment rate once again dropping as a result, should allow the region to be the only one on our short list to avoid a correction over our forecast period” with sales increases of 2.3% in 2012 and 1.1% in 2013.

TD Economics Regional Housing Forecasts % change y/y 2011E 2012F 2013F

Vancouver
Existing home sales 6.7 -2.2 -4.8
Average existing home price 16.1 -3.3 -5.8
New housing starts 18.4 16.5 15.0

Calgary
Existing home sales 7.5 0.1 -3.3
Average existing home price 0.9 0.5 -1.6
New housing starts 9.2 9.4 9.5

Edmonton
Existing home sales 2.3 0.2 -1.7
Average existing home price -1.1 0.2 -2.8
New housing starts 10.5 10.6 10.7

Saskatoon
Existing home sales 10.8 0.4 -2.3
Average existing home price 4.4 -0.3 -2.1
New housing starts 3.1 2.9 2.6

Regina
Existing home sales 8.3 1.1 -0.7
Average existing home price 7.4 -0.1 -3.5
New housing starts 2.0 1.8 1.7

Winnipeg
Existing home sales 5.6 -3.3 -0.2
Average existing home price 5.3 -0.8 -1.4
New housing starts 3.7 3.3 3.1

Ottawa-Carleton
Existing home sales -0.6 -2.6 3.3
Average existing home price 5.6 -0.5 -2.5
New housing starts 5.9 5.6 5.3

Toronto
Existing home sales  3.8 -3.6 -5.0
Average existing home price 8.1 -2.1 -6.4
New housing starts 35.3 31.4 0.0

Montreal
Existing home sales -5.1 -1.6 -1.9
Average existing home price 3.6 -0.2 -5.1
New housing starts 22.7 21.0 19.5

Quebec
Existing home sales 4.4 -3.2 0.4
Average existing home price 3.2 1.1. -3.8
New housing starts 5.2 5.0 4.8

Halifax
Existing home sales 5.4 6.9 -1.6
Average existing home price 3.4 0.3 -2.2
New housing starts 2.6 2.9 3.1

Saint John
Existing home sales  -9.4 2.3 1.1
Average existing home price -0.5 -0.5 0.5
New housing starts 0.4 0.4 0.5

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