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Canada Mortgage and Housing Corp (CMHC) slightly raised its forecast for 2011 housing starts on Monday, citing an improving economy and still-low interest rates.
In a second-quarter housing outlook, the federal housing agency also forecast higher existing home sales than industry group Canadian Real Estate Association (CREA).
It said it expected housing starts to total 179,500 units this year, then climb to 185,300 units in 2012.
In February, CMHC had said it expected 2011 housing starts of 177,600, rising to 183,800 in 2012.
New Canadian government regulations are expected to take the heat off the housing market, once the main source of Canada’s economic growth. The latest changes, aimed at mortgage amortization and refinancing, came into effect in the spring.
“We are expecting new and existing housing markets to fall in line with demographic fundamentals, as changes to mortgage rules take hold,” said Bob Dugan, chief economist for CMHC.
Additionally, Canadian interest rates are expected to stay low for a little while longer despite Monday’s data that showed Canadian growth accelerated to almost 4 percent in the first quarter. Second-quarter growth is expected to be around half of that.
The Bank of Canada will raise interest rates some time in the third quarter, in either July or September, a Reuters survey last week showed.
CMHC predicted existing home sales of 452,100 units this year, which would be 1.16 percent above the 2010 tally of 446,936 units. That is also slightly ahead of CREA, which sees 2011 sales dipping 1.3 percent to 441,100 units from 2010.
In 2012, CMHC sees sales moving up to 461,300 units, also higher than CREA’s forecast of 452,500 units.
Both groups say the recent increase in the average national price reflected strong sales in Vancouver’s resale market. CMHC expects the average price to moderate for the remainder of the year but gave no figure.

The Bank of Canada kept its key interest rate unchanged at 1 percent on Tuesday but for the first time since the recession it said it would eventually have to lift borrowing costs if economic growth continues.

“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 percent inflation target,” it stated. “Such reduction would need to be carefully considered.

It did not say whether “eventually” meant the next rate increase would be in July, September or beyond, but its statement was more hawkish than previous ones, which only said that any future hikes “would need to be carefully considered.”

The central bank now sees underlying inflation as only “relatively subdued” rather than “subdued” as in previous statements, but it did not change its overall outlook for inflation. It repeated that the persistent strength of the Canadian dollar “could create even greater headwinds for the Canadian economy” and dampen inflation.

Temporary supply chain disruptions from Japan will sharply restrain growth in the second quarter but this should be unwound afterward, it said.

It said the U.S. economy continued to grow modestly and European growth was maintaining momentum, but it said risks to peripheral European economies had increased.

The central bank became the first in the Group of Seven advanced economies to tighten monetary policy following the global financial crisis, hiking three times from June-September last year but pausing since then due to the weak global recovery.

There has been no consensus among market players on when the bank would resume the tightening cycle but July had recently been ruled out by most as a possibility.

Three of Canada’s largest commercial banks pushed back their rate hike expectations to September from July over the past two weeks.

Thirty-five of 43 forecasters surveyed by Reuters last week predicted the next rate hike would be in the third quarter, implying a move in either July or September, or both.

Overnight index swaps, which trade based on expectations for the key central bank policy rate, showed investors slightly reducing the likelihood of a rate hike in July, but increasing the odds of tightening in September, October and December.

Swaps showed markets see a 94.3 probability the central bank will keep its benchmark rate on hold in July, up from 93.56 percent just before the rate decision.