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Maybe the problem with the Canadian residential real estate market isn't that the pace of home construction is unsustainably high. Maybe the slumping pace of housing demand is the unsustainable part of the equation.

Housing starts came in at an annualized clip of 198,000 in December – down 1.7 per cent from November, and the lowest level in more than a year. Starts have now declined for four consecutive months.

Those who fear a housing crash were quick to bemoan this is still too high a pace for home construction in a housing market that has suddenly been deserted by the buying public.

The market needs only about 180,000 annual starts to roughly keep pace with the annual creation of new households in the country, and December marks the 22nd consecutive month above that equilibrium point. Meanwhile, Canada's sales of existing homes have tumbled more than 12 per cent since last April; the damage has been even worse in the country's 10 biggest urban centres, where sales last month were down an estimated 19 per cent from a year earlier.

It seems preposterous that the country's builders can still be constructing more houses and condo towers than we need, at the same time as buyers are running for the hills, doesn't it?

Well, yes, probably. But this argument glosses over the fact that housing starts are down 13 per cent since August, and 22 per cent from their peak last April. That has, more or less, matched the pace of declining home resales. At the rapid pace the starts have been retreating, they will be down to 180,000 by spring; it's only a 9-per-cent drop from here.

On the other hand, is there reason to believe purchases of homes will continue to plunge as they have in recent months? The trigger to the slump in demand was tougher new mortgage lending rules implemented in the middle of 2012 by Ottawa. These were aimed at slowing the red-hot housing market and putting the brakes on household debt loads, and they have had the desired effect. But this was a one-off event that is astronomically unlikely to be repeated in 2013; its drastic impact on sales will diminish to a trickle as the event becomes more distant in the rear-view mirror.

Prices have stubbornly resisted coming down as sales have slumped, but there are growing signs that they are beginning to give in to market reality and head downward. That should lure reluctant buyers back to the market. Meanwhile, other conditions for buyers are still generally positive. Interest rates look firmly entrenched at historically low levels, and Canada continues to generate solid employment growth.

It all suggests that home sales are more likely to find a solid floor in 2013 than to have the floorboards collapse under them. Don't assume that the weakness in the past few months is the beginning of a domino-like collapse; for both sales and starts, it may be closer to the end.

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