By Tara Perkins TORONTO (CP)

High costs for construction materials like steel and concrete are preventing home prices from falling and may push them up even though buyer demand is softening in Canada , economists say.

The increase in construction costs has outpaced the rise in new home prices for four consecutive quarters, said a report released Wednesday by Scotiabank (TSX:BNS).

"Consumers out there are going to see fairly sizable price increases because the builders will have to pass some of these costs on if they're going to proceed with the projects," Scotiabank economist Adrienne Warren said in an interview.

"So we might not see prices cooling off as much as you would suspect if it was just supply and demand." Across the country, new home prices rose by 5.1 per cent between the first quarter of 2004 and the same period this year. Meanwhile, construction costs increased by 6.4 per cent.

The average cost of a two-storey home in Toronto sat at about $442,000 in the first quarter of this year, up more than five per cent. In Vancouver , about $25,000 has been tacked on to the average price in the past six months alone.

Vancouver had the widest discrepancy between construction cost increases and home values, with rising construction costs of 7.7 per cent overwhelming house price increases of 3.5 per cent.

Warren said Vancouver homebuilders are competing with non-residential builders for materials as the city prepares to host the 2010 Winter Olympics.

Countrywide in the first quarter, steel products used in housing construction were 22 per cent more expensive than at the same time last year. Cement and concrete costs are rising four per cent annually roughly double the rate of inflation, Scotiabank said.

Compounding the pressure is the increase in fuel surcharges levied by gravel, lumber and concrete suppliers as diesel prices soar, the bank's report said.

The Scotiabank report comes one week after a Royal Bank (TSX:RY) report said higher home prices and slower income growth are eroding housing affordability.

Benjamin Tal, senior economist with CIBC World Markets, said Wednesday the cost of raw materials and labour will keep prices from plummeting but the housing market boom of the past few years fuelled by low interest rates - is unsustainable.

"This is a level of activity more than 30 per cent higher than the long-term average," he said. "I think we have probably six more months of relatively strong activity."

"The party's over, but the lights are still on. I think that's the way to describe the housing market." On Wednesday, Canada Mortgage and Housing Corp. said housing starts remained strong in May but took a bigger-than-expected dip.

The seasonally adjusted annual rate of housing starts was down five per cent to 218,800, from 230,400 in April. Economists had expected starts to come in at 225,000.

"In general this year, and more so next year, you'll probably see fewer bidding wars and homes staying on the market longer than they did last year," Warren said. "It still will be a sellers market, but not as much so as it has been the past couple years."

She said the drop in affordability and the fact that most first-time buyers who wanted to enter the market have now done so means demand will cool.

"You've probably seen your peak this year in terms of resale activity." Meanwhile, the higher costs of construction materials will begin to factor into housing upgrades. "The cost of renovations will probably be higher over the next couple of years than they had been a few years ago," Warren said.

Canadians spent an estimated $28 billion on home renovations last year, a record amount that was equivalent to two-thirds the total investment in new housing construction.

The effects of higher construction costs will not be limited to the real estate market, Warren said. "Looking ahead, mounting cost pressures are a threat to slow the booming pace of construction activity in Canada, removing one of the major sources of support to the overall economy in recent years."