The Canada Mortgage and Housing Corp said that while it expects the housing market slowdown that hit in the second half of 2012 will continue into 2013, it believes momentum will return later in 2013 and 2014.
"CMHC expects housing construction activity will trend lower in the first half of 2013, before gaining more momentum by the end of the year as economic and employment growth remain supportive of the Canadian housing market," CMHC Deputy Chief Economist Mathieu Laberge said in a statement.
"In 2014, improving economic conditions may be partially offset by a slight moderation in the number of first-time homebuyers, and potential small and steady increases in mortgage interest rates."
Canada's housing market, which roared higher in 2011 and the first half of 2012 aided by low interest rates, started slowing after the federal government tightened rules on mortgage lending in July in a bid to cool things down and prevent home buyers from taking on too much debt.
Economists are divided over whether the market will manage a soft landing or stage a U.S.-style crash. While sales have slowed and prices have begun to fall on a monthly basis, national home prices are still well above year-earlier levels.
In its quarterly outlook, CMHC said housing starts will be in the range of 178,600 to 202,000 units in 2013, with the most likely outcome 190,300 starts. That is down from 214,827 starts in 2012 and compares with the agency's November forecast for 2013 housing starts in the range of 177,300 to 209,900.
Homebuilding should then stabilize in 2014, with starts in the range of 171,200 to 217,000 units, and a most likely outcome of 194,100, the agency said.
CMHC forecast existing home sales to slow to a range of 418,200 to 484,000 units in 2013, with the most likely outcome of 451,100 units, down slightly from 453,372 in 2012. In 2014, sales are expected to range from 439,600 to 505,000 units, with the most likely outcome edging up to 472,300 units.
Price gains are expected to slow in 2013 but values will hold above 2012 levels. CMHC's forecast for the most likely average price calls for a 1 percent gain to C$367,500 ($360,300) in 2013 and a further 2.7 percent gain to C$377,300 in 2014.
(Editing by Jeffrey Hodgson)