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Workers at a condominium project under construction in Toronto in this photo from Dec. 14.MARK BLINCH/Reuters

Canada's residential construction industry is following the housing resale market down, which for many observers is a good thing for the broader economy.

Housing starts in Canada fell in December to an annual pace just shy of 198,000, down from more than 201,000 a month earlier, according to Canada Mortgage and Housing Corp. Wednesday.

That marked a decline of 1.7 per cent, and the fifth month of decline over the past six. The overall housing market has been cooling since Finance Minister Jim Flaherty tightened up mortgage rules in July.

Notable in the latest numbers was a drop of more than 4.5 per cent in starts of multiple units, such as condominiums and apartments. The condo market, of course, has been of particular concern to policy makers.

As economist Diana Petramala of Toronto-Dominion Bank notes, construction has eased from the peak levels of last year. But starts are still above the 180,000 to 190,000 "that would be considered sustainable, given demographic fundamentals," she said.

"One area of particular concern is Toronto, where the pace of construction appears to be outstripping both demand and price growth, particularly in the condo market," Ms. Petramala said in a research note.

"The surge in Toronto starts in December suggests the imbalance continued to grow in that month. Ultimately, our view is that homebuilders will eventually take their cue from the existing home market, where both demand and price growth have softened over the last half of 2012."

Senior economist Robert Kavcic of BMO Nesbitt Burns agreed, projecting a further decline this year.

"Looking ahead to 2013, homebuilding activity should soften further, with starts ultimately settling in at around 180,000 per year – this would meet underlying demographic demand, and be just the scenario that policy makers ordered."

Last year, according to economist David Onyett-Jeffries of Royal Bank of Canada, construction of new homes rose 11 per cent from a year earlier to reach a five-year high of 215,000. That was a jump of 45 per cent from the depths of the recession.

While the rebound has been crucial to Canada's recovery, however, it's now an area for worry.

"This robust pace of homebuilding activity has provided a key support to the Canadian economic recovery to this point; however, concerns have been rising that the elevated levels of housing construction, particularly multiple-unit starts, is creating market imbalances that could pose risks to the housing market and the broader economy as a whole," said Mr. Onyett-Jeffries, who expects construction to decline to about 185,000 this year and 175,000 next.

"To that end, the moderating trend in homebuilding activity seen in the second half of 2012 is a welcome development. We expect that housing starts will continue to moderate gradually over the forecast horizon as housing market activity transitions to more sustainable levels."

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