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TORONTO (Reuters) - A modest rise in Canadian home prices is likely this year as the market is tilting mildly in favor of sellers, Bank of Nova Scotia said on Tuesday.
Market watchers should expect a 2 percent decline in sales of existing homes in 2011, and a 2 percent uptick in prices, Adrienne Warren, Scotiabank's senior economist, said at a bank-sponsored forum on the Canadian real estate market's outlook and trends.
For 2012, a lack of pent-up demand and further tightening of mortgage rules, announced in mid-January, will probably dampen sales further. As well, Canadian interest rates are expected to rise by next year and increase mortgage carrying costs, and that should also pressure the market, she said.
Looking at the long-term trend in house prices relative to income, Warren estimates the current average home is about 10 percent overvalued. But she is quick to point out that this is "fairly typical" toward the end of an expansionary phase.
"It is not particularly surprising that house prices have overshot in recent years, given persistently tight resale housing supply and unprecedented low interest rates," she said.
"It is widely expected that the housing boom of the past decade will be followed by a period of softness."
She expects a soft-landing scenario will likely play out, a view that is held by several other forecasters. The Canadian Real Estate Association said last month it sees national sales activity falling just 1.6 percent this year from 2010, less than originally forecast, while prices may rise 1.3 percent.
Data shows the average price of a home in Canada was C$339,030 ($348,223) in 2010, while 473,772 units changed hands.
Phil Soper, president and chief executive of Brookfield Real Estate Services, said he expects sales in Canada's housing market will be "front-loaded" to the first half of the year as homebuyers get into market ahead of an expected rise in interest rates.
The Bank of Canada left its key interest rate unchanged at 1 percent on Tuesday and gave no signal it plans to raise rates soon, pushing market players to trim expectations of a first-half rate increase.
"They'll probably try to keep a gentle foot on the interest rate accelerator, which should allow the market to work out any overshooting on the price side that's occurred over the last year," Soper said in an interview on the sidelines of the Scotiabank conference.
"I think that's one of the big arguments -- that there wasn't enough of a reset. Prices did drop in the recession, but then they recovered, and then they grew."
Canada's housing sector came through the financial crisis relatively unscathed, compared with other global markets, posting double digit price gains in late 2009 and early 2010 after a brief dip. Low mortgage rates and a sturdy banking system encouraged home-buying and helped draw the country out of recession.
The sector is still relatively healthy, and there is little likelihood that Canada will experience a U.S.-style housing collapse, Scotiabank's Warren said.
Reporting by Ka Yan Ng; editing by Rob Wilson