By Ka Yan Ng – Reuters

Canadian real estate sales closed out the third quarter with their best-ever showing thanks to a tight market and low mortgage rates, highlighting how housing remains a rare bright spot in an otherwise weak economy.

The Canadian Real Estate Association (CREA) said on Thursday that 42,958 homes changed hands in September on a seasonally adjusted basis, up 15.6% from a year earlier. Prices also saw double-digit gains.

But analysts said a recent rise in mortgage rates, and prospect of more to come, should cool the red-hot real estate market, preventing a boom-to-bust cycle that hammered the U.S. and other Western economies.

“I’m not overly concerned that we’re creating a bubble here in the real estate market. I think it’s just more, in essence, what you would expect given demand/supply conditions right now,” said Adrienne Warren, senior economist at Scotia Economics.

“By the time we get into 2010 you’ll see continuing leveling off in demand, more listings, and a more balanced market, which would result in fairly modest price increases.”

CREA said for the July-September period, 127,941 homes were sold, up 12% from the previous quarter.

The national average price in September rose 13.6% from a year earlier to $331,602 ($321,944). For the quarter, the average price rose 11% to $327,736.

The industry group cautioned the average price continues to be skewed by sales in pricier markets, particularly Vancouver and Toronto, where year-over-year prices last month soared 14% to $610,576 and 10.3% to $406,877, respectively.

In addition to low rates, the association credited rebounding consumer confidence and “an improving overall sense of economic security” for the strength.

UNLIKELY TO FORCE CENTRAL BANK’S HAND

Canada largely avoided the meltdown in real estate prices that helped trigger the global financial crisis. Analysts credit the country’s famously conservative banks for avoiding the reckless lending practices that prompted the massive wave of foreclosures seen in the United States.

But the U.S. crisis and economic downturn have discouraged many Canadians from putting their homes on the markets. A recent report from Royal LePage, one of the country’s leading real estate brokerages, said an undersupply of homes for sale is creating the illusion of a real estate boom.

Still, at least one Canadian bank recently said it is worth watching to see whether the hot real estate market prompts the Bank of Canada to hike rates sooner or more aggressively than forecast.

In Australia, recent housing and construction data helped spur the central bank to become the first among its Western peers to tighten.

Analysts said the Bank of Canada may not have to follow suit because Canada’s major banks have already hiked mortgage rates as a rise in bond yields drives up their funding costs.

A rallying Canadian dollar has also dampened speculation the central bank would break its conditional pledge to keep interest rates low until mid-2010.

The real estate data contrasted sharply with a report on Thursday that showed factory sales slumped more than expected, exposing manufacturing as the weak link in an economy trying to exit recession.

“The relentless strength of Canadian home sales in recent months has washed away the weak start to the year. The decisive rebound also puts the Bank of Canada in a quandary — while the hot real estate market cries out for rate hikes, the runaway loonie screams “No”,” said Doug Porter, deputy chief economist at BMO Capital Markets.

————————————————————————————————————

Contact Laurin Jeffrey for more information  –  416-388-1960

————————————————————————————————————