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A for sale sign outside townhouses in the Fairview neighbourhood of Vancouver, Monday, March 4, 2013.

Rafal Gerszak/The Globe and Mail

When Finance Minister Jim Flaherty tightened home lending standards last year, Bay Street economists shrugged.

It wasn't the first time Mr. Flaherty had attempted to deflate the housing bubble. Nor was it the second or third. That was enough history to suggest a cycle.

On all previous occasions, sales immediately jumped as buyers rushed to beat the new restrictions. In the next phase, demand cratered when the stricter lending conditions kicked in. Finally, sales popped back up once potential buyers realized that interest rates still were at once-in-a-lifetime levels.

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Back in September, economists at Toronto-Dominion Bank said the time between the second and the final phase was two or three quarters. If they were right, then Canada's housing market is due for a bounce.

As if on cue, the Canadian Real Estate Association reported Monday that national sales of existing homes rose 2.4 per cent in March from February, reversing a 2.1 per cent decline the previous month. Sales have been slowing consistently since last spring, and have been flat since the end of 2012. The new figures "hint that the market may be stabilizing," Robert Hogue, an economist at Royal Bank of Canada, said in a research note. Sales should rally, if only slightly, in the months ahead as "the negative effect on homebuyer demand from the more restrictive government-backed mortgage insurance rules that came into effect in July, 2012, gradually dissipate," Mr. Hogue said.

The evolution of the housing market is critical for monetary policy.

Bank of Canada Governor Mark Carney has been able to keep the benchmark interest rate ultra-low at 1 per cent because of Mr. Flaherty's willingness to attack the bubble in home prices directly with what economists call "macro-prudential" measures.

Stoking the housing market was one of the goals of Mr. Carney's low-interest policy. However, as home prices and household debt surged to record levels, the rest of the economy remained stuck. Raising the benchmark rate would be the surest way to cool the housing market, but at the risk of squeezing what little economic growth exists outside of real estate. So Mr. Flaherty took matters into his hands. Among other things, he has lowered the amortization period for insured mortgages to 25 years from 30 years. (The amortization period was 35 years in 2011 and 40 years in 2008.) Bank of Montreal estimated the move was the equivalent of increasing mortgage rates by 0.9 of a percentage point.

The Bank of Canada recently has indicated that it thinks the growth of household debt has stabilized at a rate that is in line with the growth of incomes. Sales of existing homes were 15.3 per cent lower in March than a year earlier, and the average national price of a home was $378,532, which was 2.5 per cent higher than March, 2012.

Those figures are indicative of the gentle deflation of the housing bubble that the Bank of Canada and the Finance Department have sought to engineer. The next couple of months will be crucial in determining whether the Canadian housing market has found a new equilibrium, or whether the combination of the spring buying season and continued low rates will stoke fresh demand.

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The Bank of Canada has made clear that its next interest rate move will be an increase, a tilt meant to lean against the urge to buy houses. As Canada's economy continues to lag, some analysts say the Bank of Canada should move to a neutral stance that would amount to a loosening of policy.

If the housing market stabilizes, perhaps the central bank will do so.

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