Over the past few months, there has been increasing evidence that Canada's housing market is taking a breather. First, existing home sales in April were down by 12.2% year over year in April 2008. Second, while still positive, year-over-year increases in both new and existing house prices have slowed since the middle of last year. Third, the number of completed and unoccupied vacant dwellings has trended steadily higher since late in 2006.

This softening in housing demand has occurred against a background of strong economic fundamentals. These include a healthy (+310,000 jobs) increase in full time employment over the past 12 months, solid 4.5% growth of average weekly wages, fiscal stimulus in the form of both income and sales tax cuts and some easing of mortgage rates.

The fact that housing demand is cooling despite these strong economic fundamentals indicates that (after five years of sustained strong growth) the pent up demand for housing that built up during the 1990's has all but dissipated. It also suggests that the erosion of affordability which has occurred over the past three years, together with some deterioration in consumer confidence in the wake of the U.S. sub prime crisis, is causing an increased number of first-time buyers to hesitate before entering the market.

Looking forward, although sales of new and existing homes should continue to be supported by the generally strong economic fundamentals already noted, a further moderation in demand appears likely given that the impact of the slowdown in the U.S. will exert increased drag on Canada's job growth in the second half of the year.

Having said this, the significant number of large multi-unit projects currently under construction in Alberta, British Columbia and in Ontario should underpin construction employment into 2009. In addition, the relatively strong economic fundamentals should cause residential renovation spending to remain strong into 2009.