Lumber prices have begun to turn the corner and consumption should pick up next year as the housing market in both the U.S. and Canada continues to improve, a report from TD Economics says.

However, the bank warns the "sustained recovery" won't mean an end to production cuts at mills across Canada in the near term.

In a report released Tuesday, TD says lumber prices are expected to rise gradually next year, but not return to their long-term average of about $400 US per thousand board feet until 2011.

"Following several months of supply outpacing demand, the lumber market has finally begun to tighten, inventories have fallen to their lowest level in over five years and producers are now able to have more of an influence on prices," writes TD economist Dina Cover.

Prices should dip slightly in the fourth quarter to an average of $225 US, before rising to $280 by the end of 2010, she says.

"While definitely an improvement, prices will still be low compared to historical standards, with this bounce back only bringing prices back to 2007 levels," Cover says.

"The full recovery — when prices return to historical norms — will come in 2011 and beyond," she says.

Cover says prices "turned the corner" in June, after trading around the $200 mark for seven months. Prices hit a nine-month high of $245 in early July.

"But even with the improvement in fundamentals, the lumber market still has a bumpy road ahead," she says.

The report predicts there will be more production cuts through 2010 as Canadian producers continue to feel squeezed by the higher Canadian dollar, export taxes and the impact of the mountain pine beetle that has harmed forests in Western Canada.