markets among advanced nations in 2010, though

also one of the most volatile. An unusually active

winter and spring, prompted by pent-up demand,

expectations of rising interest rates that only

partially materialized, the looming transition to a

Harmonized Sales Tax (HST) in Ontario and British

Columbia, and pending changes in lending

qualifying criteria, gave way to an unusually soft summer. Over the

fall, sales have returned to a more typical, sustainable level.

Pricing has mirrored demand. Average

inflation-adjusted home price appreciation

swung from a twelve-month gain of 16.6%

y/y in Q1 to a decline of 1.5% y/y in Q3.

More recent monthly data point to a

stabilization, with prices essentially

unchanged in the twelve months to

November. For the year as a whole, real

home prices likely averaged about 5%

above 2009 levels.

We are neither overtly optimistic nor

pessimistic regarding the outlook for 2011.

On the one hand, we expect interest rates to

remain at historically low levels, with the Bank of Canada deferring

any further rate hikes until late 2011 given an uncertain global

economic outlook and subdued inflation, and longerterm

borrowing costs drifting up only modestly. This

is an extremely powerful inducement for both firsttime

and move-up buyers and should maintain a

decent level of sales.

Yet, demand will likely be tempered by more

moderate employment and income growth as

government restraint efforts take hold. Public sector

hiring has accounted for fully a third of the net new

jobs created in Canada over the past year, a pattern

not likely to be repeated next year. Overall, we

anticipate a fairly lacklustre year for residential

housing, with modestly higher sales volumes and

flat inflation-adjusted prices (equivalent to a 2%

increase in nominal terms). The bigger risk likely

awaits 2012 when more significant interest rate

increases, combined with record high home prices,

will notably strain affordability.