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A U.S. flag decorates a for-sale sign at a home in the Capitol Hill neighborhood of Washington, in this August 21, 2012 file photo.JONATHAN ERNST/Reuters

Housing activity in the United States is gearing up while Canada's residential real estate market appears to be in for a soft landing, Bank of Nova Scotia economist Adrienne Warren says in a new research note.

While average prices in the U.S. are still about 30 per cent lower than their 2005 peak, the long road to recovery has begun. Real home prices in the third quarter were 5 per cent higher than a year ago, an acceleration from the 3-per-cent advance in the prior quarter, Ms. Warren noted.

"At the same time, Canadian housing activity has geared down," she added. Average home prices were moderately below those of last year in each of the first three quarters of 2012 after adjusting for inflation.

Sales are also weaker, and the moderation in activity mirrors a modest softening in labour market conditions over the summer, the note said.

Moreover, "high and rising home prices combined with consecutive rounds of tightening in mortgage insurance rules in recent years have contributed to a deterioration in housing affordability, most notably for first-time buyers." And anecdotal reports point to a lower level of interest from foreign buyers or investors.

All told, Ms. Warren expects housing demand to remain on the softer side for now, as households become more cautious about adding to their already high debt loads. "This could put some further downward pressure on sale volumes as well as prices, especially in markets that have already shifted into buyers' territory (eg. Vancouver) or in certain market segments that are potentially oversupplied (eg. condominiums in Toronto)," she wrote. The pace of home construction activity is also likely to moderate over the next year.

"However, with the Canadian economy continuing to post healthy job growth, and sellers proving responsive to the underlying shift in market conditions, a sharp decline in prices nationally is unlikely," the report said.