After many false calls, there is now convincing evidence that Canada’s housing market has come off the boil, according to the latest Real Estate Trends by Scotia Economics. Home resale’s, having fallen for four consecutive months, are running about 15 per cent below last summer’s historic peak. Average annual home price appreciation has eased back into the mid single digits, as overall market conditions come into better balance. Adjusted for inflation, the average resale home price in Canada registered its first quarterly decline in seven years in the first quarter of 2008.

According to the report, cracks are appearing on the new home front as well. While housing starts in early 2008 are essentially tracking last year’s elevated levels, demand for new residential building permits has fallen sharply. Price increases for new homes are moderating, while inventories of unsold new homes are trending higher.

The report also states that the cooling in overall activity is most notable in many of Canada’s hottest urban housing markets in recent years, including Calgary and Edmonton. Both centres have officially moved into buyers’ territory as soaring prices weaken demand and fuel new listings. More generally, however, economic conditions continue to favour the resource-rich markets in the West over manufacturing-dominated centres in Central Canada. Regina and Saskatoon are currently in the strongest sellers’ position nationally, supported by good afford-ability, rising population inflows and tight supply.

Risk of a major correction still low, Canada’s recent record of home price appreciation, averaging 10 per cent from 2002 to 2007, was unsustainable, and a return to more historical norms is a welcome development by everybody. The faster and longer home prices climb, the greater the risk of an eventual price correction. Canada’s last two major housing booms of the 1970s and 1980s were both followed by some degree of real price stagnation or decline, an essential ingredient to restoring afford-ability and generating renewed pent-up housing demand.

Canada’s real estate market is not overbuilt. While inventories of unsold homes are trending higher, the number of unabsorbed units, including condominiums, remains well below prior peaks in most major centres. Tighter lending guidelines and high construction costs have contributed to a more cautious approach among builders.

Households, for their part, are not over leveraged. Home equity as a share of real estate assets is near record highs, with price appreciation out pacing the rise in mortgage obligations. Mortgage carrying costs as a share of disposable incomes are historically low despite rising home prices.

Overall mortgage quality is still sound. Canadian lenders have maintained conservative loan qualifying criteria in recent years even while introducing a range of new products, including interest-only mortgages, no down payment mortgages, and extended amortization of up to 40 years. Canada does not have ultra-low teaser rate mortgages that have contributed heavily to U.S. defaults as they reset. Adjustable-rate mortgages, sub-prime lending, borrowing against home equity, and insured investor mortgages all account for a much smaller share of the Canadian mortgage market than in the United States.