Stephen Jarislowsky, chairman of Montreal-based investment adviser Jarislowsky Fraser Ltd., said he is “convinced” there’s a bubble in Canada’s housing market, fueled by government measures that encouraged consumers to take on debt.

“They have basically encouraged people to buy houses based on cheap mortgages,” Jarislowsky, 84, said in a telephone interview from Montreal. “That has created the opposite effect of what was desirable.”

Canadian home prices and resales will grow to records this year, boosted by low interest rates, the Canadian Real Estate Association said in a report this week. Canadian new-home prices rose 0.4 percent in December from the previous month, the sixth straight gain, government figures showed yesterday.

“I am convinced there is a housing bubble in Canada,” said Jarislowsky, whose investment fund owns shares in Canada’s four biggest banks, including Toronto-based Royal Bank of Canada.

The comments by Jarislowsky, who is one of Canada’s wealthiest investors with a fortune worth C$1.85 billion ($1.8 billion) according to Canadian Business magazine, contrast with the view held by Finance Minister Jim Flaherty, who sees “no clear evidence” of a housing bubble, his spokesman, Chisholm Pothier, said this week. 

The average price of a Canadian home is expected to decline by 8 per cent this year before rising by about 1 per cent in 2010, says a forecast by the Canadian Real Estate Association.

"We are caught in a cycle where consumer confidence has been eroded by job losses, and consumer confidence is an essential ingredient for housing sales activity," CREA president Calvin Lindberg said in a report released yesterday.

The average Canadian home price was $303,594 at the end of 2008, but that should drop to $279,400 by the end of this year before rebounding slightly next year, according to the association that represents realtors in Canada.

Ontario should see prices fall to an average of $279,100, down from $302,354, while British Columbia will see the biggest hit to prices with a fall of 10.9 per cent, followed by Alberta at 8.9 per cent. Newfoundland is predicted to buck the trend, with prices rising by 4.8 per cent this year.

Sales activity is also forecast to fall by 16.9 per cent this year, but realtors are predicting a rebound of 9.9 per cent in 2010, marked by a second-half acceleration based on a recovering economy.

While the forecast is optimistic compared with those of some analysts – who believe the housing market may not recover for several years given the last housing downturn, which saw average prices fall for seven straight years in the Toronto area – the report is in line with other economists who predict the housing market will start to show signs of recovery next year.

"The correction in Canada's housing market continues to unfold and it appears the pace is a bit quicker than we had originally anticipated," Charmaine Buskas, senior economics strategist with TD Securities, said in a note yesterday. "In the face of continued economic weakness, housing may not see a rebound until early 2010."

Canadian housing starts fell 10.9 per cent in January to 153,500 annualized units, the fifth consecutive monthly decline, resulting in the slowest pace of residential construction activity since 2001, according to a separate report by the Canada Mortgage and Housing Corp. yesterday.

"The Canadian housing correction is in full swing, having a wide impact across the country," BMO Capital Markets economist Robert Kavcic said in a note. "With sales activity showing no signs of life, residential construction will be under pressure for most of 2009."

The Toronto Real Estate Board reported 2,670 sales in January compared with 5,075 at the same time last year, a drop of 47 per cent.

The average price was $343,632 – more than $30,000 less than the same time last year.

Meanwhile, a report by Toronto-based Altus Group reiterates fears over the burgeoning condo inventory in the Greater Toronto Area.

According to the housing research firm, 94 new projects were launched in the GTA in 2008, with 55 per cent of units remaining unsold by year's end.

Altus forecasts project cancellations will be more frequent this year as "many projects in the pre-construction stage are far from achieving a sufficient per cent of units sold to obtain financing."

The report says the situation may be less dire than during the housing bubble of the '80s because mortgage rates and investor activity were much higher then.

More than twice as many Canadians as last year say they expect home prices across the country to fall, according to a new survey by a national mortgage industry association.

The Canadian Association of Accredited Mortgage Professionals (CAAMP) says that 35 per cent of Canadians now believe that home prices will drop, up from 17 per cent last fall.

Jim Murphy, the president and CEO of CAAMP, believes the survey results suggest recent news coverage of the economic crisis may be having an impact on attitudes about the housing sector.

"I think (the numbers are) reflective of the attitudes about the economy overall -- and the media reports that are out there and the statistics that are provided," he said from Toronto.

Here is what the CAAMP survey found:

• Twice as many people as last fall, or 35 per cent, now believe home prices will drop.
• The number of people who thought prices would go up fell from 40 per cent to 20 per cent.
• Residents in the West are most negative. In B.C., 48 per cent said they expect prices to fall.
• Thirty-eight per cent of Canadians believe now is a good time to purchase a house and 32 per cent say it's a bad time. These figures are similar to last year's results.

The survey also found that almost 85 per cent of home owners are satisfied with their mortgages.

"In historical terms mortgage rates are still very low, so when people are asked why they're happy about their mortgages, the number one reason is the rate," Murphy said.

CAAMP's chief economist Will Dunning said the mortgage crisis in the U.S. doesn't appear to have hurt consumer confidence in Canada's housing sector.

"Canada is a financially conservative country where consumers are able to meet the terms of their mortgages and buying decisions are based on affordability," said Dunning in a press release.

"This contributes to a solid real estate market that will not experience the same drop off we see south of the border."

The information for the CAAMP report was gathered by Maritz from an online survey of over 2,000 Canadians in mid-October. Last week, the Canadian Real Estate Associate reported that the multiple listing service (MLS) dropped 14 per cent in October. It was the biggest month-to-month decrease since mid-1994.

The drop in Canadian home prices in September may not be as severe as it seemed, TD Securities said on Wednesday, bolstering the case that the country is not headed for a U.S.-style housing meltdown TD, a unit of Toronto-Dominion Bank, argued in a report that home prices fell 1.3 percent in major Canadian markets in September, not the dramatic 6.2 percent drop that was reported by the Canadian Real Estate Association (CREA) last week.

CREA said the average house price fell to C$315,461 (about $252,000), dragged down by sales declines in Vancouver and Victoria, British Columbia, which offset rebounds in Calgary and Edmonton, Alberta. CREA said the fall came despite year-over-year gains in average home prices in 17 of 25 major Canadian markets.

TD crunched its own numbers and applied a weighting to each major city to fix "compositional shifts", which it said were behind the distorted CREA view. It said the association has acknowledged the problem.

For example, if Vancouver was the only city that reported sales in one month, and the next month Montreal was the only city that reported, then it might seem that prices had fallen in half because Montreal prices are much less expensive than those in Vancouver.

TD fixed the weight of each city to year-earlier sales levels as of September 2007.

"We wanted to get rid of the whole compositional issue. We really just controlled for the allocation. When we did that we ended up with a 1 percent drop instead of a 6 percent drop," said Eric Lascelles, chief economics and rates strategist at TD Securities.

"That's not catastrophically different, but to me that's a number that makes more sense. Yes the housing market is correcting moderately but it does not have the making of a U.S.-style correction."

He said Canadian housing starts may fall below the 200,000 mark, home prices will continue to correct in some inflated cities, but there is no need to brace for big delinquencies or a hard drop in prices.

The TD calculations aren't perfect, Lascelles acknowledged, because they do not eliminate some factors such as type and quality of home in each city.

Canadian housing data has shown signs of softness but nowhere near the slump that hit that United States, stemming from a crisis in the subprime mortgage sector.