Taking away the punch bowl
By Peter Diekmeyer • Bankrate.com

Canada's real estate sector entered the new year with a huge tailwind at its back. Most key indicators of both current and future performance, including gross domestic product (GDP) growth, jobs and industry statistics, are either heading in the right direction or are downright bullish.

In a Monetary Policy Report released recently, the Bank of Canada raised its growth projections for the economy, which it now expects to expand by 2.9 per cent this year and by close to 3.5 per cent during 2011. "Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold," the bank said.

As if that were not enough, the Canadian Real Estate Association (CREA) recently reported that existing homes sales through its Multiple Listing Service (MLS) hit an all-time high of 27,744 units during December, a full 72 per cent higher than the total recorded one year earlier. House prices are doing well, too -- the average price of homes sold during December came in at $337,410, up 19 per cent from the previous year.

Construction activity is also starting to pick up. According to the Canada Mortgage and Housing Corporation (CMHC), housing starts reached 174,500 units on a seasonally adjusted basis. That pace remains far lower than the average of the past five years, though it represents a respectable bounce-back from the recession-level lows of 2009.

That said, the elephant sitting quietly in the corner of the room is the question of what will happen to interest rates, whose current low levels have driven much of the economy's recent strength.

Why interest rates matter
Two days before the release of its Monetary Policy Report, the Bank of Canada announced that it would maintain its overnight rate target at 0.25 per cent and reiterated its conditional commitment to maintaining the rate at that level until at least the end of the second quarter.

However, the economy's recent strength has some economists thinking the central bank may act sooner. "We are wondering whether the bank has paid enough attention to the degree at which Canada's job market has performed better than America's," says Yannick Desnoyers, assistant chief economist at National Bank Financial. Desnoyers worked at the Bank of Canada for several years before taking on his current gig, and thus has special insight into its inner workings. He believes the central bank could begin monetary tightening as early as April.