By Ka Yan Ng

TORONTO (Reuters) - Canada's rapidly cooling
housing market is robbing the nation's economic recovery of one
of its main drivers, but most industry watchers still think the
once booming sector will avoid a U.S.-style crash.

Low mortgage rates, a healthy banking system and higher
lending standards than in the United States are expected to
support a market that saw double-digit price and sales gains in
late 2009 and early 2010.

But many analysts and industry figures warn sales levels
will slow, and property prices, at best, are likely to stagnate
over the next 12 months.

"It was one of the key drivers of the recovery. We can't
expect that, in 2011, to continue. It gave us what it could and
it doesn't have anything else to give," said Phil Soper, chief
executive of Royal LePage Real Estate Services, one of the
country's largest brokers.

After taking a brief hit from the financial crisis,
Canada's housing sector broke away from the global trend and
rebounded forcefully last year.

Bidding wars broke out for properties in Vancouver and
Toronto, even as homeowners from Florida to California
struggled to sell, or to abandon heavily mortgaged homes to
their lenders.

With the bursting of U.S. and European property bubbles
fresh in its mind, the Canadian government tightened lending
rules earlier this year to cool the market.

Still, activity and prices heated up in the first half as
buyers raced to avoid the stricter rules and new blended sales
tax regimes introduced in two of the country's biggest markets,
Ontario and British Columbia.

Some transactions were also brought forward to sidestep
anticipated interest rate hikes by the Bank of Canada, which
tightened policy in June and July, and has also warned that
residential investment will weaken.

"It brought forward some activity and now we've entered the
payback period and so I'm not shocked," said Robert Hogue,
senior economist at Royal Bank of Canada.

"I don't think the recent trends are a sign that a bubble
had formed and a bubble is now bursting."


Indisputably, the sector is cooling. Sales of existing
homes fell nearly 25 percent, seasonally adjusted, in July from
a year earlier, while the average home price was up a slim 1
percent, according to the Canadian Real Estate Association.

Bank of Nova Scotia recently declared that housing
was "lost" as driver of growth after housing starts fell in
July for a third straight month.

Talk of a U.S.-style housing crash was revived this week
when the Canadian Centre for Policy Alternatives said the
housing market was "an accident waiting to happen". It
predicted that in a worst case scenario, prices could fall more
than 30 percent in some markets.

But that view was contradicted the same day by a report
from another think tank. The C.D. Howe Institute argued that
Canada's housing policies would blunt the risk of a massive
wave of defaults.

It noted tighter lending standards protected the Canadian
housing market from the build-up of high-risk mortgage loans
seen in the United States. It argued this should shield the
Canadian market from the fate of its southern neighbor.

But an equally important factor for Canada's housing market
may be a bond market rally that has kept mortgage rates near
historic lows. Bank of Montreal cut its five-year
low-rate mortgage to 3.59 percent from 3.79 percent this week.


Low rates may support the Canadian market, but few see much
upside. David Rosenberg, who correctly predicted the U.S.
housing downturn when he was a Merrill Lynch economist, said he
expects Canada's housing market to go through four to six
quarters of extremely sluggish growth.

"That mini-housing boom was not what I would refer to as
totally organic. All these policies and the expiry dates
brought forward a tremendous amount of housing consumption,"
said Rosenberg, chief economist at Gluskin Sheff & Associates.

"We're paying the price for that distortion right now. We
have to couple that distortion now with the reality that the
economy broadly is going to be slowing down."

Royal LePage's Soper also sees stagnant prices over the
next 12 months, but he said prices will return to a steady rate
of appreciation, around 3 percent, after that.

"The real estate market in general should chug along nicely
at about the same rate -- which is not exactly exciting. But
it's much better than the alternative, which we saw south of
the border," he said.

($1=$1.05 Canadian)
(Editing by Jeffrey Hodgson and Peter Galloway)