Source: The Canadian Press

Canada’s housing market appeared headed for a soft landing — but not a crash — after recording the worst month of the year in terms of starts in December.

Canada Mortgage and Housing Corp. reported Tuesday that housing starts fell to an annualized rate of 171,500 last month, well down from November’s rate of 198,200 units.

Most of the drop was attributed to fewer multiple-family dwelling units — condos and apartment buildings — mostly in Ontario, although single-family housing starts also fell.

Recent reports suggest that starts are on a downward track toward 170,000, a number that many believe is the sustainable level for new homes in Canada, down from an estimated 192,500 units in 2010.

CMHC chief economist Bob Dugan said he is forecasting 2011 will see about 174,000 new homes built, with a worst-case scenario of 149,000, which would take the market to the recession low.

“Soft landing is a nice way to describe it,” he said. “I don’t see a reasonable scenario where the housing market would crash.”

Last year’s tally was just barely short of the red-hot years between 2002 and 2008, which saw seven straight years of plus-200,000 starts.

Given that the economic recovery only started in July 2009, the quick recovery of the housing market and record-high prices in the re-sale market, raised fears among some that Canada was headed for a housing bubble.

The U.S. market has yet to recover three years after its crash. Facing a glut of properties, starts in the U.S. have fallen to a fraction of pre-slump peaks. According to a new report Tuesday, prices are down 26% from their 2006 highs — a slightly bigger drop in home values than occurred during the first five years of the Great Depression.

Dugan never subscribed to the “housing bubble” scenario for Canada, although he agreed record-low interest rates have been instrumental in the rebound.

Still, the fundamentals supporting the housing sector remain in place, including growing employment, rising salaries, a growing population and a sound banking system.

Bank of Montreal economist Robert Kavcic agreed the recent soft data in housing means the bubble fears are “pretty out the window now.”

Concerns about a bubble might have been justified in the spring of 2010, when starts approached record highs and prices surpassed pre-recession peaks.

Demand began to ease in the second half of 2010, however, after the Bank of Canada began telegraphing it would start raising rates. As well, the harmonized sales taxes in Ontario and British Columbia went into effect July, increasing the costs of buying a home, and stricter rules on mortgage lending that began in April likely discouraged some buyers.

During the last three months of 2010, housing starts averaged an annualized pace of 181,600, with December the weakest month.

On Monday, Statistics Canada reported that building permits fell 11.2% in November from the previous month, with the value of residential permits declining 7.2%. Permits are an indicator of long-term building intentions.

Brian Bethune of IHS Global Insight said the longer-term prospective for housing in Canada is for continued slowing, and with prices, which are currently estimated at about 10% above fundamentals, softening.

“The housing industry is losing considerable momentum,” he said. “Housing starts are forecast to be lower in 2011, much closer to the long-run average.”

The CMHC’s own projection is for re-sale prices to increase less than 1% this year.

The Bank of Canada has also forecast a slowing of the housing market after the torrid rebound from recessionary levels, while warning homebuyers not to take on too much debt in purchasing homes.

In recent months, Flaherty hinted he is prepared to intervene with tighter lending restrictions if a bubble develops.

December’s drop-off in housing starts was mostly due to a plunge in the multiple starts segment, especially in Ontario, the CMHC said. Urban multiple starts fell 20.1% to 84,500 units.

Single-detached starts were also down, but minimally. The seasonally adjusted annual rate of urban starts fell 13.3% to 149,100 units in December.

December’s seasonally adjusted annual rate of urban starts decreased 45.4% in Ontario and 9.8% in Atlantic Canada, but British Columbia saw a gain of 46.8% and in Quebec, starts rose 13.5%.