The brick wall of affordability has finally hit Canada. A slide that started in Western Canada has now reached Toronto. Canada's Housing Boom Is Over.

"Canada's six-year housing market boom is officially over," said Douglas Porter, deputy chief economist at BMO Capital Markets."

The Canadian Real Estate Association reported 75,476 homes changed hands in the first quarter of 2008, down 13% from the first quarter of 2007. In March, sales dropped 18.7% from the same month the year before, including a 39.7% slide in Calgary, a 34% drop in Edmonton and a 22.2% drop in Toronto.

New listings surged 29.8% in Calgary and 52% in Edmonton in the first quarter as the market has run into a brick wall of affordability, slowing growth and immigration after years of spectacular price gains.

"Double-digit declines in resale activity at the same time as sizable listing increases don't bode well for the controlled housing cool-down [that was expected]," said Derek Holt, vice-president of economics at Scotia Capital. "The fact that it showed up very strongly in the Toronto numbers as well suggests it's not just a Western Canadian story."

Still, most economists do not think Canada is heading for the kind of housing meltdown the United States is going through. Employment, the key driver of housing sales, is still strong and Canada did not indulge in nearly the same amount of high-risk sub-prime mortgage lending as the United States.

Canadians have been taking out longer amortizations -- as much as 40 years in some cases -- to afford the price increases of recent years, but there has been little of the no-documentation, low-documentation or interest-only mortgage origination that fueled so much of the U.S. housing boom.

Ted Carmichael, chief economist at JPMorgan, notes U.S. housing starts crested at more than two million at the peak of the U.S. boom at the turn of 2007, well above the 1.5 million that demographic trends should have allowed.

Canadian housing starts peaked at 277,300 in September, 2007, and have definitely been running hot in the 225,000 range, but the demand has been there; a lot has come from Canadians migrating to Western Canada in search of work as well as new international immigration to Canada's big cities.

"I would say Canada's situation right now is somewhat better than it was when we were going into the 1990 to '91 recession," Mr. Carmichael said. "Since 1990, home builders have learned to sell their homes largely before they build them."

Mr. Carmichael thinks starts will drop back below 200,000 and it would not be surprising to see outright price declines in the next 12 to 18 months. He added the Bank of Canada will have to cut interest rates even more significantly to make home buying more affordable again.

Ongoing turmoil in the international credit markets have not left Canadian banks unscathed. Even though the central bank has slashed its key interest rate to 3.50% from 4.50% since December, mortgage rates have come down only about half as much. Banks are facing higher funding rates themselves and have been reluctant to pass on the savings fully.

Many economists expect the Bank of Canada to cut rates another half a percentage point on Tuesday, perhaps invigorating the spring selling season, which could prove to be the key test for the Canadian housing market going forward.