Canada's housing market continued to show signs of cooling last month, but still no evidence of a correction that would seriously impact the economy.

The Canada Mortgage and Housing Corp. reported Tuesday housing starts for September totalled 19,750. That's 220,200 units annualized, a slight decrease from the upwardly revised 225,300 units the previous month.

The agency said the seasonally adjusted annual rate of urban starts decreased by 3.0 per cent in September to 203,731 units.

But the September number was still above the consensus forecast of about 205,000 and well north of what economists consider would be required to meet the growth rate in household formations.

"In our view, Canada still has overbuilding concerns," said TD economist Francis Fong.

Low interest rates buoy demand

"Demand for new homes is primarily being supported by accommodative interest rates."

In a new global outlook released Monday, the International Monetary Fund singled out housing and household debt, which currently sits at a near-record 152 per cent of income, the key areas of concerns for Canada.

"An important domestic vulnerability in Canada relates to the housing market," the Washington-based financial institution said. "A sharp or sustained decline in house prices could seriously set back the leveraged household sector and domestic demand."

Those concerns have been voiced before, including by Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty, who has moved four times in as many years to reduce mortgage lending.

Scotiabank economist Derek Holt says he expects Canada's economy will take a little bit of a hit from housing during the third quarter, noting that while still strong, new home construction during the summer was below the level achieved in the spring.

Economists expect the slowing to continue across the board in starts, sales and prices in subsequent months.

Over-saturation, high prices, high debt levels and recent tightening of mortgage rules are already impacting the resale market, they note, particularly in the previously torrid markets of Toronto and Vancouver.

Cooling expected

Bank of Montreal economist Robert Kavcic noted that condo re-sales in Toronto were down 27 per cent during the month from September 2011. So building should follow, eventually, he said.

"The gradual cooling will likely persist given the sales slowdown currently taking place in a number of major markets," he predicted.

In fact, Toronto saw the most acute retreat in starts during September in the CMHC report, down 38.2 per cent, or about 24,600 units. Ontario as a whole was lower by 18.2 per cent, or 16,000 units.

"As expected, the number of multiples starts in Ontario, particularly in Toronto, reverted back to a level more in line with the average pace of activity over the last six months," said Mathieu Laberge, deputy chief economist at CMHC.

"Following a period of elevated housing starts activity due to strong volumes of multi-family unit pre-sales in 2010 and 2011, the pace of housing starts is expected to moderate."

Elsewhere, seasonally adjusted annual rate of urban starts increased by 17.6 per cent in the Prairies, 20.3 per cent in Atlantic Canada, were up by 1.3 per cent in Quebec and edged down 3.7 per cent in British Columbia

Overall, single starts fell by 1.4 per cent 67,643 units, while multiple urban starts decreased by 3.9 per cent to 136,088 units.