Mortgage Watch

It said the current resale market was like "night and day" compared with the beginning of the year.

The group said its new forecast for a 1.5 percent rise to C$309,500 ($283,945) for the average home price contrasts with a call for a 5.2 percent drop to C$287,700 in its May outlook.

CREA also revised its forecast for 2009 sales to 432,600 units, a 0.4 percent decline from 2008 when 434,477 units changed hands.

That is a much smaller retreat than the May forecast, when the association expected sales would drop 14.7 percent from 2008 -- itself a revision from a previous prediction of a 16.9 percent drop in sales.

"The recovery in Canadian housing I think was beyond the imagination of even the most strident optimist. It truly is remarkable and I think that revision just reflects it," said Doug Porter, deputy chief economist at BMO Capital Markets.

The Canadian residential property market was hit hard in the final quarter of 2008 as the recession choked off demand, and accounted for more than half of the decline in transactions from 2007, the record high year. Sales tumbled 17.1 percent in 2008 from 2007.

The data from the last six months has increasingly shown that people are venturing back into the market. Low mortgage rates and signs that the worst of the economic slump is over are stimulating demand.

There has also been a turnaround in consumer sentiment, underscored by Thursday's report from the Conference Board of Canada that showed confidence rose in August for the sixth straight month.

British Columbia and Ontario are now expected to see an annual increase in sales activity, while CREA cut its forecast declines for several provinces, including Alberta, Saskatchewan and Quebec.

Nearly all provinces are expected to see a higher average price this year, except Alberta, where the average is seen falling 4.4 percent. British Columbia is expected to be relatively stable with a 0.1 percent dip.

For 2010, the average price nationally is expected to rise 2.1 percent to C$315,900, while sales activity is seen gaining 5.3 percent to 455,400 units.

"Unlike the Bank of Canada, we don't expect growth to average above the non-inflationary potential until 2011," Shenfeld added.

"But even under (Bank of Canada) Governor (Mark) Carney's more optimistic trajectory, inflation will still be feeling the downward pressure of a sizable output gap next year, one as large as we saw in the early 1980s and 1990s downturns."

He predicted both headline and core prices would cross paths in the second quarter of 2010, at a level well under the Bank of Canada's two per cent target.

"As a result, Canada's inflation rate will be no threat to the bank easily fulfilling its pledge to keep interest rates at a slim quarter point through mid-2010," he said. "In fact, market expectations for rate hikes in the first half of 2010 could be a full year too premature."

While the core inflation rate did not decelerate as much as the Bank of Canada predicted earlier this year, there are reasons to expect a further easing in core inflation ahead, Shenfeld said, including "what economists call the income effect."

Shenfeld notes that by stripping out volatile items from the CPI, the Bank of Canada's core measure now excludes most of the items that have been deflating.

With the volatile measures included, headline CPI is negative, largely driven by the dive in gasoline prices from a year ago. Lower gas prices have pulled down costs for intercity transportation fares as well, which the Bank of Canada also excludes from core inflation. Other non-core items such as natural gas, fuel oil and mortgage interest costs have also eased off.

"The deep dive in non-core items has left those Canadians still working with some spending power," Shenfeld said in explaining the income effect.

"While nominal wages have begun to decelerate in a slack labour market, a negative year-on-year inflation rate has meant that in real terms, the buying power of the average wage has escalated."

"So after filling their gas tank and paying their new, lower, mortgage bills, Canadians simply have more money in their pockets when they go shopping for other items, keeping those prices aloft."

Shenfeld notes that economic slack usually takes time to exert its disinflationary force and believes the upward pressure on prices will ease in the coming months.

Meanwhile, less benign headline inflation expected next year "implies diminished buying power for other goods, contributing to a cooling in core CPI."

"With a lag, a strong Canadian dollar will also provide a dampening impact on retail prices for imported goods and services."

Meanwhile, unlike the central bank's outlook, the CIBC report does not see the Canadian economy gaining much benefit from a forecasted U.S. recovery.

CIBC's analysis finds that protectionist trade barriers and a tilt in U.S. stimulus spending towards industries that have less-than-average propensities to import from Canada, will dampen the benefits that this country typically sees from economic growth south of the border.

Officials from the U.N. Economic Commission for Europe , which covers North America, Europe and the former Soviet Union, made the forecasts of recovery at the presentation of a report showing the forestry products industry had suffered one of its biggest ever drops in consumption last year.

"We have just seen the early indications of a turn-up in housing in the United States, and that is the new housing starts have ceased to go down, which is a positive sign to us that perhaps we have hit the bottom," Ed Pepke, one of the authors of the report, told a news conference.

He said U.S. new house building needed to return to about a million a year, from unsustainable levels of 2 million or more a few years ago.

ENERGY DEMAND

Despite the financial crisis, which was triggered by lax U.S. mortgage lending, demand for wood as an energy source had been growing, UNECE said.

World wood fuel pellet production grew by 20 percent in 2008 to nearly 10 million tonnes and is expected to approach 12 million this year, with capacity doubling to more than 20 million by 2012, it said.

Europe is the largest consumer and producer of wood fuel pellets, while Canada is the single largest exporter, mainly to Europe, UNECE said in a statement.

Asia could become an important consumer, too, as the first large-scale industrial projects to co-fire coal with wood biomass took place in Japan in 2008, it said.

The UNECE region accounts for 42 percent of the world's forests, and its 56 countries account for 60 percent of production and 57 percent of consumption of global wood and paper products.

The fall in consumption last year reflected primarily the collapse in housing construction in the United States and to a lesser extent in Europe.

Fewer than half a million houses are being built in the U.S. this year, 75 percent down from 2.2 million in 2006, Pepke said.

The U.S. housing collapse devastated Canada's forestry industry, which sends 90 percent of its production to its neighbour. The strong Canadian dollar also hurt, he said.

Consumption of forestry products fell 8.5 percent in 2008 to 1.26 million cubic metres equivalent. Within the UNECE region, consumption fell 17.7 percent in North America and 10.6 percent in Europe, but rose 6 percent in the former Soviet Union.

The wood energy sector is increasingly sourcing material directly from forests instead of using wood-processing waste as a by-product because of the fall in timber production.

UNECE officials say wood energy has good prospects as a sustainable and carbon-neutral energy form, as felling of trees in the region is less than growth, in contrast to deforestation seen in South America, Asia and Oceania.

"The forests in our region are accumulating more and more wood every year ... There is potential for using more wood for industry and for energy," Pepke said.