Will rate cuts prolong Canada's real estate surge?
By Peter Diekmeyer • Bankrate.com

Last week, all eyes were turned to the economy. Stock markets fluctuated wildly amidst speculation that the US economy may be headed into a recession. To guard against this, the US Federal Reserve made its largest policy rate cut in 15 years, a move that provided the Bank of Canada room to cut rates, too.

All this has left Canadian housing sector stakeholders' heads spinning, wondering what it all means. On one hand, house prices and new construction have been doing well. However, Canada's job market remains heavily exposed to developments in the United States, our largest trading partner. Counterbalancing that is the fact that recent central bank rate cuts are putting downward pressure on mortgage interest expenses, which for many Canadians is their largest housing-related cost.

Strong resale and housing start activity
To get an accurate picture of Canada's housing market, you need to look at a variety of indicators. The good news is that despite recent turmoil, on the whole, these indicators are broadly positive. For example, the Canadian Real Estate Association (CREA) recently released its 2007 results. The data show that existing home sales, new listings and dollar volume of sales in Canada's major markets as measured by the association's Multiple Listing Service all reached their highest levels ever.

While much of that data is of interest mostly to housing industry insiders, one statistic is vitally important to homeowners: the average selling price of Canadian homes in CREA's major markets surged an impressive 11.6 percent during the fourth quarter of 2007 to a record $333,105.

Not surprisingly, construction activity has also been strong. According to the Canada Mortgage and Housing Corporation (CMHC), housing starts, which declined slightly in December, totaled an estimated 229,600 units during 2007, their second-highest level ever. Housing starts are important, because not only do they provide high-paying jobs for workers in construction and related industries, they also stimulate a slew of spin-off purchases ranging from appliances to snow removal contracts.

Interest rates and the US economy
There is considerable debate among economists on how badly the US economic slowdown will affect Canada. In fact, economists can't even agree on how bad the US slowdown will be. Many forecasters think the data will eventually show that the American economy has already slipped into recession, while others think the US is merely headed for a period of extended sluggishness.

Whatever the case may be, the stakes are huge for Canada. Depending on how highly the Canadian dollar is valued, our exports to the United States total between one-quarter and one-third of the Canadian Gross Domestic Product (GDP). So, when America catches a cold, a lot of Canadian jobs are at stake.