Watching for Danger Signs in Canada
Through April 2008, housing starts in Canada are about even with last year. So far, there has been scant evidence of a collapse in the market similar to what has transpired in the U.S. Nevertheless, one has to remain vigilant in order to spot developing trouble. The unsold inventory levels for singles/semis and multiples are a case in point.

Inventory of Singles/Semis Too High by 50%
The accompanying graph for Canada shows that the inventory of unsold single and semi-detached units is on a fairly steep upward-climbing path. They currently stand about 50% higher than they should be.

It does appear that builders are paying attention to this trend. Through April, single-family starts in Canada were -15.0% versus the first four months of last year. Furthermore, singles and semis under construction have been declining for the past four months.

Inventory of Multiples Too High by Double
The inventory of unsold multiples in Canada is too high by about double. However, it has been at that level for more than three years, with no fall-off in starts. A plateau in the unsold inventory of multiples has been reached at around nine thousand units and the figure in the latest month actually fell back a bit from the level of the previous month.

The high-rise market has been strong in Canada for a number of reasons including: (1) empty nesters and young professionals opting for downtown lifestyles as opposed to being "buried" in the "burbs"; (2) a lower sticker price for most condo units (along with smaller square footage) as opposed to large single-family dwellings; and (3) an influx of foreign money that wants a little piece of this resource-rich and currency-rising country.

Multiple unit starts (+29%) have been up significantly so far this year across the country. Moreover, multiples under construction have been rising consistently on a month-to-month basis, with April +3.8% versus March. Current low interest rates are stimulative for housing construction, but there is doubt about how long they will last, with inflation around the world heating up every day.

Caution Flag
The Canadian economy has entered a period of slower growth and this has mildly negative implications for employment prospects. Also some degree of fatigue is inevitable with respect to housing demand after six years of exceptional strength. Given all of these factors, the high level of unsold multiples should be viewed as a caution flag. The build-up of inventory could quickly turn into a serious problem.