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House prices will increase this year and next despite the challenges posed by higher mortgage rates, Canada Mortgage and Housing Corp. said Wednesday.

An "improved balance between demand and supply" will stabilize prices through the rest of this year, it said in its second-quarter Housing Market Outlook. Prices will "rise modestly" in 2011, it said.

The agency, which insures almost $500-million of Canadian mortgages, said the average cost of a home by the end of 2011 should be $350,000. That would be a gain of 1.4 per cent over April's record high of $344,968.

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Forecasting higher prices next year puts the agency at odds with the Canadian Real Estate Association and Toronto-Dominion Bank, both of which are calling for prices to drop by 1.5 per cent and 2.7 per cent respectively in 2011.

"It all comes down to the economy, and what we've seen so far this year is a strong end to 2009 and through 2010 we've seen some effects from various fiscal measures," said CMHC senior economist Bill Clark. "There was a big April gain in employment, and as the economy gets moving again people become more interested in housing."

While prices have rebounded strongly from the recession, economists have warned that higher mortgage rates and tougher qualification guidelines could price would-be homeowners out of the market in the second half of this year.

While prices were up some 12 per cent year-over-year in April, the number of listings increased by 100,000 units and this helped to temper the frantic market. Sales slipped 2.6 per cent, the third time in four months they declined. CMHC attributed much of the sales activity in the first half of the year to pent-up demand, as buyers returned to the market after sitting out during the recession.

"Once this demand is exhausted, and as mortgage rates gradually rise, the pace of activity in the resale market will ease," CMHC economist Bob Dugan said.

CMHC forecast that between 484,000 to 513,300 houses will sell in 2010, and then slide back slightly in 2011 to between 443,500 to 504,900.

The agency also said that after building 149,081 units in 2009, builders should construct between 166,900 and 199,600 units in 2010. In 2011, it said housing starts will hit between 148,600 and 208,800 units.

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"Canadian housing markets have recovered from the low levels posted in early 2009," Mr. Dugan said. "Moving forward, housing starts will moderate as activity becomes more in-line with long term demographic fundamentals."

It has been difficult to accurately make forecasts on the housing market through the recession, however. Its forecast for 2009 housing starts was off by 19.4 per cent. The agency was only off by 1.5 per cent the previous year, and its goal is to always be within 10 per cent of the actual figures.

"For the first time in several years, our forecast accuracy was not within the 10-per-cent range because of volatile market conditions," it said.

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