The level of average monthly housing starts (seasonally adjusted at annual rates) in Canada through October of this year has fallen by 5% versus the same period in 2007. As such, this drop remains quite low, but evidence is growing that more erosion is setting in.

Home-buying sentiment in Canada has suffered some setbacks of late. The average price of existing home sold in Canada declined by 10% year over year in October. Who wants to buy a home when prices are on a downward trajectory?

Inventory of Unsold Units is Expanding
The inventory of unsold new homes is expanding. The level of vacant multiples is too high by about 70% and the level of vacant singles and semis is too high by about 60%. However, both of these figure pale by comparison with the U.S., where there is an almost one-year's supply of excess new housing stock, at current sales rates.

Economic Outlook has turned Riskier
Canadians have been watching developments south of the border, as well as internationally, and understand that the economic outlook has turned riskier for incomes and job security. Furthermore, many individuals are suffering some real wealth declines due to stock market losses.

The ripple effects of commodity price declines, resource project cutbacks, financial market uncertainty and business sector retrenchments have not been fully realized yet. Potential home buyers will make the assessment that it is better to wait for interest rate volatility, personal credit availability and gasoline price variability to settle down.

Regional Housing Markets in Canada − Some Wide Swings

The decline in overall housing starts in Canada so far this year, through October, has been gentle, at only -5%. Nevertheless, the easing in starts is evident, with a majority of provinces and Census Metro Areas (CMAs) in decline, and some wide regional swings.

Only two provinces have had a strong level of starts so far in 2008 − Newfoundland and Labrador (+24%), where more robust energy and mining sectors have led to net inward migration and higher wealth, and Ontario (+19%), which has been bolstered by the remarkable strength in Toronto's multi-unit (i.e., condo) construction market. The collapse in commodity prices is bound to take some of the spring out of Newfoundland's housing bounce. And Ontario is about to be sideswiped by events internationally.

Toronto's total starts are ahead 31% year to date, led by multiples at +69%, while singles are -18%. Toronto cannot be expected to maintain its momentum. The unemployment rate in the city is already close to 7% (versus 6.2% nationally) and the Detroit Three auto sector is fighting for survival. Also financial services firms are shedding jobs worldwide and there are bound to be some repercussions in the financial capital of Canada.

The weakest pockets of regional housing starts are in the West, especially in Alberta (-33%) where Calgary's starts have dropped by 14% and Edmonton's by 55%. Those two cities were at or near record highs two years ago. The outlook for the energy sector has taken a nosedive with the decline in oil prices. Announced delays of mega energy projects will further cut into housing starts as labour demand weakens in the year ahead.