The U.S. is by far Canada?s most important economic partner. Around 80% of our exports go to the United States, and two-thirds of our imports are ?Made in the U.S.? This situation suggests a strong economic bond and interdependence. However, the economic conditions of some markets can?t be more different. The most obvious is demonstrated in a comparison of the real estate markets. While the U.S. property market has been suffering for four years, Canada?s market is flourishing.

Before we ask why it is like that and what developments we can expect in the future, let me introduce bits of recent history. When the U.S. housing bubble burst back in the summer of 2006, Canada became worried that the troubles would be transmitted here. There were some reasons to believe that it might happen?the Canadian market was booming for several years, reaching record high prices in 2007. The average annual price growth in Canada during 2000-2009 was 5.2%, the highest average appreciation in the last 50 years. And home ownership rates reached the highest levels ever.

Neighbours by Pete Williamson

However, the real estate market started to quickly lose momentum during the last quarter of 2008, with dismal numbers being reported in autumn. Finally, in the winter of 2008/2009 the markets froze completely, especially the strongest ones (Vancouver and Toronto). Realtors experienced sales declines of often higher than 50% on a year-to-year basis. As the whole economy slowed, it was feared that a long and painful real estate market recession was ahead.

Surprisingly, the market rebounded sooner than anyone expected. The decline reversed during the spring of 2009, and the sales numbers rocketed through to summer. In the winter of 2009/2010, realtors were reporting sales increases in excess of 100%. Average prices exceeded the pre-crash level of the fourth quarter 2009.

There are several reasons, why the Canadian market did (and does) better than most of the world?s real estate markets. Most experts believe the main reason can be attributed to extremely low interest rates, introduced by the Bank of Canada, which slashed rates down to a record low 0.25%. U.S. rates were comparably low as well, but there are reasons why the low-rate policy helped in Canada but not so much in the States:

? The Canadian mortgage market was not as riddled with subprime mortgages as the U.S. market. Approximately 5% (potentially upwards of 10%) of loans in Canada can be assigned to the subprime category, while subprime loans in the U.S. took a 22% share of all loans during the critical years, 2006-2008.

? Canadian banks are repeatedly ranked as the soundest in the world by the World Economic Forum. This institutional stance helped to avoid the subsequent credit crunch.

? Our unemployment rate has risen, as it has in the U.S.; however, the increase wasn?t as severe, and our economy has been slowly adding jobs again since last summer. Also, Canada?s social system helped to lessen personal bankruptcies.

To sum up, the Canadian real estate market is on a solid footing. It is so good, in fact, that there are voices in the background whispering of a new and more dangerous housing bubble ahead. I don?t believe this is the case, for several reasons.

The Bank of Canada promised to keep rates steady until summer 2010. As this date approaches, most experts believe we will begin to see rate increase, and most of the Canadian banks have already started inching up mortgage rates. Similarly, despite not having an official deadline, the window for taking advantage of the First-Time Home Buyers? Tax Credit is slowly shrinking. Finally, the shortage of new listings, which we have been experiencing since the autumn of 2009, is slowly letting up. There has been an increasing influx of new listings over the last 2-3 months, which has helped to stabilize the inventory level. These factors will surely cause the Canadian market to slow down in the second half of 2010, with moderating prices and leveled sales. The resale market is expected to receive slightly positive boost from the implemented harmonized sales tax in Ontario and British Columbia, which will come into effect this summer. Since this (highly opposed) tax will affect new homes, demand for housing is expected to shift to the resale market.

The Canadian real estate market is in good shape and poised for investors. Transaction costs are low (expect round-trip transaction costs around 4.5%-10%), and there are virtually no restrictions on foreigners buying properties in Canada.

If you invest now, you will probably enjoy some months more of appreciation. However, this will be leveraged by the uncertain effect of potential interest rate hikes and the HST implementation. If you invest near the end of 2010 or later, the price gains may be more moderate, but you will be taking part in a solid market backed by a sound financial system and robust economy, which for the last decade has appreciated above inflation despite the surrounding financial crisis.