09/27/2011 01:52 EDT | Updated 11/27/2011 05:12 EST

Canada's housing market strong globally but uncertainty could sideline buyers

MONTREAL - Canada's housing market stands out globally for its strength but economic uncertainty and weaker consumer confidence could keep potential new buyers on the sidelines, a Scotia Economics report says.

"Overall, you're probably in an environment where businesses and consumers will be a little bit more cautious and that would spill over to the housing market," Scotiabank senior economist Adrienne Warren said Tuesday after the report.

The Scotiabank report said Canada's housing market is notable for its "resilience and longevity."

And even though Canadian real estate prices were up five per cent year-over-year in the April to June period, they started to level out in July and August, Warren said from Toronto.

"I just think the other factor we've seen in the slowing and softening of prices just reflects the fact that the housing market itself has become fairly balanced between the number of buyers and sellers out there," she said.

"If anything, I think the cooling off in prices is positive for longer-term affordability for buyers."

While interest rates are expected to remain low for some time, the Canadian economy is showing signs of losing some momentum, a factor that would affect house purchases.

"So the question mark will be to keep an eye on the job market," she said.

Interest rates are expected to go up gradually once they begin to rise and consumers should be able to adjust, she added.

"Typically, we find that there's not really a high correlation with interest rates and direction of home prices as much as there is with labour market conditions."

Scotiabank's latest real-estate outlook said Canada has shown a resilience that few other countries have been able to maintain.

Scotiabank (TSX:BNS) noted that of the nine major developed markets it tracks, only Canada, France and Switzerland showed housing price increases year over year.

"We expect global housing demand to remain moribund until the global economic recovery gets back on a firmer footing and some financial market stability returns."

Canada has had a strong housing market since about 2000, but expects house prices to more or less level off over the next couple of years, Warren said.

"From a demographic perspective, the people who had wanted to come into the market and take advantage of the low interest rates, a lot of that has been satisfied."

While Canada has charted its own course in the housing market, the U.S. real estate market hasn't recovered yet and has a spill-over effect in this country, she said.

The weakness in the U.S. housing market is a big factor contributing to the continued weak U.S. economy. That spills over to Canada's forestry sector, which supplies building materials for their housing market.

While home prices rose for a fourth straight month in most major U.S. cities in July, buoyed by the peak buying season, the housing market remains depressed and prices are expected to decline in the coming months, said the Standard & Poor's/Case-Shiller index on Tuesday.

Also on Tuesday, BMO Capital Markets deputy chief economist Doug Porter told the MPs that growth will be very modest at best for this year and next.

"While we continue to believe that Canada and the U.S. will manage to claw out some growth over the next year, it looks to be very modest at best," Porter told the House of Commons Finance committee.

"Given such subdued growth, I would say that it would really only take one more negative shock to basically tip the economy over into an outright downturn," Porter said.