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The Canadian Real Estate Association is now forecasting an additional 2.3-per-cent rise in prices next year, to $391,100.Deborah Baic/The Globe and Mail

Canada's housing market is on track to close out 2013 on a stronger note than last year, defying the expectations of economists just a few months ago.

The picture is mixed across the country, and sales are certainly not on a runaway train. But their strength contrasts starkly with the plethora of lacklustre forecasts that were made earlier this year, after sales fell as a result of Finance Minister Jim Flaherty's decision to tighten mortgage insurance rules in July, 2012.

The degree to which prices are surpassing expectations is even higher. That's a development that could be worrying to policy makers in Ottawa, amid international debate about how overvalued Canadian house prices are and whether a bubble has formed.

The Canadian Real Estate Association said on Monday that it now expects the average price of houses sold over the Multiple Listing Service to have risen by 5.2 per cent this year, to $382,200. Heading into 2013, CREA had been expecting the average price to rise just 0.3 per cent; it became even more pessimistic in March when it revised its forecast and called for a 0.2-per-cent decline, to $362,600.

CREA's prediction for the number of houses that will change hands this year is now 458,200, which would be a 0.8-per-cent increase from 2012. In contrast, at the outset of 2013, CREA was expecting sales to fall 2 per cent, and by March it was expecting sales to fall by 2.9 per cent.

CREA noted that rising mortgage rates appear to have bolstered sales this fall by prompting buyers to move more quickly than they otherwise would have. The increase in average prices is being skewed to a degree by the strong rebounds in pricier markets such as Toronto and Vancouver.

But CREA, which represents real estate agents in Canada and tracks sales via the MLS system, is calling for sales to grow by 3.7 per cent in 2014, while it expects average prices to rise by 2.3 per cent.

"While we would not describe the housing market as the 'comeback kid' just yet, the market is certainly showing us its reluctance to fade to the background," said Toronto-Dominion Bank economist Sonya Gulati.

She expects that higher mortgage rates will eat into affordability and prevent the market from taking off over the next few years. That would put a damper on economic growth but would be good news for worrisome household debt levels and house prices. Deutsche Bank economists in New York released a report last week saying they believe that Canadian house prices are 60 per cent too high, and that "Canada is in trouble."

The ratio of household credit-market debt to disposable income climbed to 163.7 per cent in the third quarter, Statistics Canada reported last week. "Household leverage continues to rise despite mortgage rates increasing roughly 40 to 60 basis points since the spring," National Bank analysts said in a research note on Monday.

At the same time, rising house prices led to a 1.8-per-cent increase, or $20-billion, in the value of real estate assets last quarter, Royal Bank economists noted.

Bank of Canada Governor Stephen Poloz said last Thursday that he expects imbalances in household borrowing and residential investment to stabilize and then gradually unwind in coming years, leading to a soft landing in the housing market. But he also noted that "there is a risk that household imbalances could keep building and set the stage for a sharp correction down the road."

Resales rose 5.9 per cent in November on a year-over-year basis, with the monthly showing coming in slightly above the 10-year average, CREA said. The average sales price was 9.8 per cent higher, which Ms. Gulati noted is "far above the pace of household income growth."

The MLS Home Price Index, which seeks to account for changes in the types or locations of houses that are selling to create a more apples-to-apples comparison, rose by 4.1 per cent.

That was the fastest rate of price growth in 16 months, according to Bank of Montreal economist Robert Kavcic. Last week, Teranet and National Bank released their house price index, which showed that prices rose 3.4 per cent in November from a year earlier, compared with a 3.1-per-cent gain in October. On a month-to-month basis, the index declined 0.1 per cent from October to November.

A new report by the Canadian Real Estate Association released Monday showed the change in real estate prices across Canada. The following table shows how home prices have changed in several Canadian cities. Read the full story.

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