The worst of Canada's housing market woes appear to be past but the sector's rebound will be tenuous as a rise in mortgage rates and high unemployment limit the recovery in prices and sales.

Property experts say first-time buyers and Bank of Canada rate cuts have helped restore stability to a market that slumped from late 2008 to early this year, when the worst leg of the global financial crisis battered consumer confidence.

"We should be less fearful than we were six months ago, but I don't think we should be exuberant yet. The resale markets in Canada are very strong. May numbers were pretty good, and June numbers will be even better," said Will Dunning, an economic consultant who specializes in the housing market.

"But by July and into the fall there will be an offset of considerably slower activity. I don't think it's likely to go off a cliff. It'll depend on what happens in employment and the broader economy, and how that affects confidence."

Recent data suggests Canada's residential property market, which weathered the financial crisis much better than its hard-hit U.S. counterpart, has been thawing for several months.

The latest Canadian Real Estate Association data shows May resale home prices rose 0.4% to $319,757, topping the previous record set a year earlier. It was the first year-over-year increase since May last year. And sales activity climbed for a fourth straight month.

The industry group, which represents more than 97,000 real estate brokers and agents, also cut its forecast for a drop in home prices this year and said it expected sales activity to trend higher.

Meanwhile, Canada Mortgage and Housing Corp., the national housing agency, forecast in its second-quarter outlook that new home construction is expected to decline to 141,900 units in 2009 but rebound next year.

Still, no one predicts the residential property market is headed back to the heady times seen between 2002 and 2007, when prices surged and outpaced income growth. In some cities, such as Vancouver, British Columbia, and Calgary, Alberta, home prices doubled and are now going through a sharp correction.

A "stable but unremarkable" period for the real estate market is expected this year, said Philip Soper, chief executive officer of Brookfield Real Estate Services, an arm of Canadian property giant Brookfield Properties Corp. that holds real estate broker brand Royal LePage.

"Stability is something you can't overemphasize in terms of its importance for the housing market right now."

Unless the global financial system succumbs to another crisis, analysts expect the Canadian home market is likely to stabilize further.

Activity from first-time buyers appears to be providing support because of stimulative measures by the federal government that allow these buyers to defray closing costs and withdraw more from retirement funds.

The Bank of Canada has also pledged to keep interest rates near zero until mid-2010, which could underpin confidence.

But the economy is still on shaky ground, contracting for the ninth straight month in April. And the unemployment rate spiked to an 11-year high in May, boosted by massive layoffs in the factories of Ontario.

Experts warn that further job losses in pockets of Canada's export-oriented economy could slow the momentum that has been gathering in the housing sector.

"We don't expect the recession to end until the fall. It's clear that the spring fling in housing markets, this remarkable surge in resales and prices, has been driven by record low mortgage rates," said Sal Guatieri, senior economist at BMO Capital Markets.

These record low rates, whether variable or fixed, had increased affordability for many buyers. But weakness in the bond market, caused in part by reduced investor demand for safe-haven assets, has pushed mortgage rates higher.

The posted rate on a five-year mortgage at Royal Bank of Canada, the country's largest lender, has risen to 5.85% from 5.25% in April.

Brookfield's Mr. Soper has been telling his management team to prepare for softness in the housing market in the second half.

"The advice I have been giving ... is to accept the recovery this spring with humility, to continue to plan for a difficult second half of the year although the comparables are going to be positive simply because the second half of 2008 was so poor," he said in an interview.

"But at least we have a stable market and stable prices, which is something that you need to encourage consumers to trade."

More people are seeing condominiums as an attractive investment opportunity than was the case a year ago, according to a survey released Monday.

TD Canada Trust said 44% of respondents in a survey of urban Canadians said conditions had improved over the last year with regard to the prospects of buying a condo for investment purposes. That was up from 21% in a similar survey done last year.

The bank said lower prices and Canada mortgage rates are the main reason people are being drawn to condos as a way to make money over the longer term.

"This is a good time to explore a condo purchase given that mortgage rates are very attractive right now and many condos have dropped significantly in price," Joan Dal Bianco, the bank's vice-president of real estate secured lending, said in a statement

In fact, 43% of the respondents said if they couldn't afford a condominium right now, they'd consider partnering with a friend or relative to buy one for investment purposes.

But there were other reasons than investing people had for wanting to buy a condo. The most popular one, cited by 39 per cent of survey takers, was that condos require less maintenance than house do. The second most cited reason for buying a condo, a 21 per cent, was that they're more affordable than houses.

The survey, done by Angus Reid Strategies, involved 200 respondents in the cities or surrounding areas of Vancouver, Calgary, Toronto, Montreal and Halifax between March 30 and April 7.

Canada's housing industry showed signs of life in February after several months of declines, with resales rising 8.6% from January thanks to lower mortgage rates and prices, the Canadian Real Estate Association reported Monday.

Despite February's gains, sales are still down 31% year over year, as are prices, which have fallen 9.2% in the past 12 months, CREA said.

Still, atotal of 28,669 homes changed hands in February on a seasonally adjusted basis via the industry group's Multiple Listing Service. It is the first month-to-month uptick in home-resale activity since September 2008.

"Typically, the spring market we're moving into generates more activity, and this year there are the benefits from historically low mortgage rates and improved affordability in most markets," said CREA president Calvin Lindberg.

CREA cautioned that listings remain high, although the number is trending lower, with 65,060 units listed for sale in February, down 10.9% from the same month a year ago.

"The housing supply is expected to continue easing, but it will take time before it realigns with lower demand," said CREA chief economist Gregory Klump.

"Economic uncertainty is keeping home buyers in a cautious mood, so homes are taking longer to sell than in recent years. Lower sales activity at the higher end of the price spectrum will keep the national MLS residential average price under downward pressure."

The national average price for home sales via the MLS was $281,972. Canada Mortgage rates, meanwhile, are near historic lows. On Friday, for instance, TD Canada Trust lowered its seven-year fixed mortgage rate by 0.2 points to 6.8%.

CREA said February's 9.2% annualized price decline is smaller than year-over-year drops posted in the past four months and is the first time the pace of decline decelerated since turning negative in July 2008.

"The report does offer some hope that the decline in Canadian home prices may have stabilized somewhat in February after appearing to have accelerated in the latter months of 2008," said TD Securities economics strategist Millan Mulraine.

"Not surprisingly, the biggest decline in prices were in Calgary (down 10.8% year over year), Greater Vancouver (down 13%), and Windsor (down 15.7%). However, prices in Toronto (down 5.4%) were also lower, while prices in Montreal (up 2.2%) and Quebec City (up 9.3%) continue to rise, albeit at a more modest clip," Mr. Mulraine said.

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.