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Real estate ‘Sold’ and ‘For Sale’ signs in Toronto's East end on Dec. 16, 2013.

Deborah Baic/The Globe and Mail

Canadian home prices rose by more than economists expected in January, reaching a new high.

The 0.4-per-cent increase from December marked the strongest jump in prices during the month of January since 2010, according to data from the Teranet-National Bank house price index. The gain compares to an increase of less than 0.1 per cent during December, while home prices had ticked down in November.

The country's home prices are being closely watched as international experts continue to debate the degree to which the housing market is overvalued.

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The federal government has taken numerous steps to cool the market in recent years, in an attempt to steer it towards a so-called "soft landing" in which it gradually loses some steam while avoiding a crash. Finance Minister Jim Flaherty tightened the rules for mortgage insurance in July of 2012, making it somewhat harder for many consumers to get a mortgage, and both he and the central bank appear to be more comfortable with the state of the market now than they were then. A number of economists are also confident that a soft landing is being achieved.

This week's federal budget noted that "the government continues to implement measures to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector." Mr. Flaherty has cut the amount of portfolio, or bulk, insurance that Canada Mortgage and Housing Corp. can sell this year to $9-billion from $11-billion. The Crown corporation will be allowed to guarantee up to $80-billion worth of National Housing Act mortgage backed securities this year, down $5-billion from the prior year's limit, and up to $40-billion of Canada Mortgage Bonds, a $10-billion reduction from the prior year's limit.

The tightening of the mortgage market rules has impacted home sales, but economists continue to be surprised by the degree to which prices are holding up.

"While regional differences exist, Canada's housing market generally continues to hold firm," Krishen Rangasamy, an economist at National Bank, wrote in a research note.

"But don't expect January's stronger-than-expected price gains to be repeated throughout the year," he added. "Downward price pressures could become more apparent in regions that are close to or in a buyers' market e.g. Ottawa-Gatineau, Halifax, Montreal and Quebec City. Even cities that are in a 'balanced' territory like Toronto can expect some downward price pressures in the condo segment where inventories, according to Realnet, are relatively high."

The rise in prices from December to January was supported by gains in eight of the index's 11 regions. Vancouver saw prices rise 1.1 per cent during the first month of the year, homes in Toronto and Quebec City gained 0.5 per cent, Calgary 0.4 per cent, Hamilton 0.3 per cent, Montreal and Winnipeg 0.2 per cent and Edmonton 0.04 per cent.

But prices in Halifax dropped 1.7 per cent, Victoria fell 0.3 per cent, and Ottawa-Gatineau was down 1.1 per cent.

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Compared to January of 2013, national prices were up 4.5 per cent. That represents an acceleration: they had risen 3.8 per cent from December 2012 to December 2013. In fact, the 4.5 per cent increase marks an 18-month high.

Compared to the prior year, Vancouver saw prices rise 7.6 per cent, Calgary 7.1 per cent, Toronto 5.8 per cent, Hamilton 5.1 per cent, Edmonton 4.4 per cent, Winnipeg 3.9 per cent, Montreal 0.8 per cent, and Quebec City 0.6 per cent. Prices fell by 2.9 per cent in Halifax, by 5.7 per cent in Victoria, and by 0.6 per cent in Ottawa-Gatineau. It's the first time that prices have dropped on an annual basis in the capital region.

"Home price gains are still exceeding income growth by a considerable margin, especially in larger real estate markets like Toronto and Vancouver," Toronto-Dominion Bank economic analyst Sonny Scarfone wrote in a research note, adding that a low supply of new listings is one of the factors that's putting upward pressure on prices.

But he added that bond yields are likely to rise over time, which will lead to increasing mortgage rates.

"As a consequence, the current stronger than expected prices are likely to soften over the medium term," he wrote.

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