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Houses in east Vancouver, B.C.

DARRYL DYCK/The Globe and Mail

Home prices in Canada are expected to climb by almost 5 per cent next year as buyer demand in the Greater Toronto Area overwhelms the impact of tougher mortgage qualification rules, according to a Royal LePage forecast for Canada's housing market.

Royal LePage has kicked off the season for 2018 housing forecasts with a relatively optimistic outlook, predicting fairly modest impacts from new rules taking effect Jan. 1 that will require buyers to meet a higher stress-test hurdle to qualify for mortgages.

Royal LePage chief executive officer Phil Soper expects slower markets in the first half of 2018 as buyers adjust to the new rules, but he said natural supply and demand forces will ultimately triumph over "regulatory tinkering."

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Read also: Home prices fall on Ontario weakness

Mr. Soper said Canada's buoyant economy, growing housing demand from "peak" millennials who are over the age of 25 today, plus increasing immigration and intra-provincial migration to Vancouver and Toronto are all creating a strong demand for housing in both of Canada's priciest cities.

"The economic momentum outweighs the impact of the regulations," he said in an interview. "If the regulations, particularly the stress test, had not been implemented, I believe we would be seeing double-digit home price increases in the GTA in 2018."

The forecast predicts a 4.9-per-cent increase in the Royal LePage national home price index – which measures home prices in 53 Canadian cities – to a national composite price of $661,919 by the end of 2018.

The Greater Toronto Area is expected to have the highest price increase of any major Canadian city next year, with the composite price expected to climb by 6.8 per cent to $901,392. The price increase will be driven by growth in the condominium sector, in which more buyers will find affordable entry-level properties, Royal LePage said.

Sales of detached homes, by comparison, are expected to soften further in Toronto in the first half of 2018, but volumes for the full year are expected to remain similar to 2017 levels after buyers adjust to the new mortgage rules.

Mr. Soper believes there is a greater risk of a return to runaway price increases in Toronto and Vancouver than a market crash in both cities.

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In Greater Vancouver, home prices are expected to increase 5.2 per cent next year to an aggregate price of $1,353,924 with British Columbia forecast to have a top-performing economy in 2018. A shortage of housing supply will continue to add pricing pressure, Royal LePage said.

The forecast said a trend expected to continue to constrain the Vancouver housing market is the hesitation by home owners to put their properties up for sale because they anticipate they won't be able to find something else to buy.

While the mortgage changes announced by Canada's banking regulator – the Office of the Superintendent of Financial Institutions – are expected to succeed in slowing growth in Toronto and Vancouver next year, Mr. Soper expects they will have an even bigger impact in curbing sales in other cities where buyer demand is not as strong.

"It's the right thing, I believe, to do for the Canadian economy, but it's not without a price," he said. "They could put even more aggressive regulations in place and bring home prices to a halt in Toronto and Vancouver, but it would be devastating to the rest of the country. So policy makers have to choose how far they're willing to go."

The forecast predicts Regina will have a flat year in 2018 with prices rising just 0.7 per cent to an aggregate of $329,289 by the end of the year.

Edmonton is expected to see prices fall 1.5 per cent in 2018 to a composite price of $382,180 by the end of the year. Prices in Calgary are forecast to rise 2.3 per cent to an aggregate price of $494,109 as oil prices stabilize and employment improves.

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The Greater Montreal Area is expected to have the second-highest price growth in Canada next year after Toronto, with the composite price forecast to climb 5.5 per cent to $408,285 by the end of the year.

Unemployment in Quebec reached its lowest level since 1976 in November, the report said, and foreign buyers are playing an increasing role in driving sales in some high-end neighbourhoods in downtown, Westmount and Ville Mont-Royal.

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