As CanaData predicted more than a year ago, after one of the strongest sustained periods of growth in more than 20 years, Canada's housing market is now slowing.

This slowdown is driven by the combined impact of two key factors.

(1) The first is a significant deterioration in home affordability, particularly in Alberta, British Columbia and, more recently, Saskatchewan.

The effect of the rapid run-up in house prices over the past three years has been exacerbated by falling resource prices and a slowing of investment spending. This situation has in turn led to a significant slowdown in inter-provincial migration.

(2) The second factor is the impact of slowing U.S. demand for Canadian manufacturing exports, which has contributed to a significant slowdown in full-time employment, one of the key drivers of housing demand.

While affordability in central Canada has not deteriorated to the same extent that it has in the west, the uneven impact of these factors on housing demand across the country is evident in the December report of MLS home sales.

This report indicated that, while home sales in Canada as a whole declined by 17% in 2008, over half of this drop was due to weaker sales in British Columbia and Alberta. This fact is significant, since these two provinces are home to less than a quarter of the country's 33 million inhabitants.

In contrast, Ontario home sales fell by 15% and in Québec they were down by a relatively modest 5%.

Despite the sharp drop in the volume of existing home sales in 2008, the average sale price of the 139,558 homes sold during the year declined by less than 1%. This comparatively slight decline is in sharp contrast to the 15% year-over-year drop in U.S. house prices reported by Standard & Poor's/Case-Schiller Index during the first 10 months of 2008.

Looking forward, CanaData expects that the effects of the sharp drop in full-time employment in the final quarter of 2008, together with the likelihood of further job losses through the first half of 2009, will shrink housing demand significantly during the next six to nine months, before it stages a gradual recovery late in the year.