TORONTO (Reuters) - Conditions in the Canadian housing market remain "favorable," with overall prices rising and few signs of excess supply, Sheryl Kennedy, deputy governor of the Bank of Canada, said in a speech on Monday.
"The moderation in activity and price increases that we have seen in recent months is both expected and welcome," Kennedy told an investment industry conference in Banff, Alberta.
House prices play a big role in the nation's economy, she said: they can directly affect inflation, consumption, and decision-making in "the real economy" if a bubble inflates or pops.
Policy makers at the Bank of Canada consider those implications when setting interest rates, Kennedy said.
The central bank surprised financial market watchers earlier this month when it refrained from cutting interest rates, citing a higher risk of inflation from rising energy prices.
A major, widespread reversal in house prices is "unlikely" in the near term because the proportion of unoccupied, newly built dwellings in most Canadian cities is below historical average, Kennedy said.
The recent deceleration in house prices has been most noticeable in certain markets, such as the energy-rich province of Alberta, which had racked up "very steep" price increases in the past two years, she said.
Earlier this month, Statistics Canada said the annual rise in new housing prices slowed to 5.2 percent, its weakest pace since September 2005, as prices in the Western Canadian cities of Edmonton and Calgary slowed.
A declining trend in building permits also suggests that supply is adjusting to softening demand, while "the Canadian mortgage market is in reasonably good shape," Kennedy said.
Although the Canadian housing market is not showing signs of excess supply, current problems in the U.S. housing market and lessons from previous boom-and-bust cycles mean that policy makers cannot become complacent, she noted.
In the short term, new house construction and resale listings can be slow to adjust to market changes in demand, "and therefore significant price changes can occur," Kennedy warned.
The deputy governor talked about Canada's "more conservative mortgage culture," but urged domestic lenders to apply consistent standards in both good times and bad.
Innovations in mortgages and home equity loans should not depend on an assumption of appreciating house prices, and they need to be transparent so that market participants understand the risks they are taking, Kennedy said.
Reporting by Lynne Olver; editing by Rob Wilson