It now comes down to oil and housing in Canada. Both were booming for years. Banks bent over backwards to fund the euphoria. The phenomenal housing market barely took a breather during the Financial Crisis when housing in the US collapsed. Prices and new construction have soared since. And oil production was on a roll. Housing construction and oil production contribute strongly to the local economy. And both are now in trouble.

In February, housing starts dropped 16.4% on a seasonally adjusted annualized basis to a rate of 156,276 units, the lowest level since 2009, the Canadian Mortgage and Housing Corp (CMHC) reported. Economists had expected 180,000. On an actual, raw-number basis, housing starts in February dropped to 9,776, down 16.1% from a year ago.

The harsh winter weather was blamed, which is always a convenient and reliable place to lay the blame on in February. For this weather reason, February is usually a very slow month for housing starts, and not necessarily indicative for the rest of the year. So we’ll try not to read too much into it, but….

“The trend in housing starts decreased for a fifth consecutive month in February and reflects a decreasing trend in multiple starts,” said CMHC Chief Economist Bob Dugan. So this wasn’t a fluke.

And it was broad based, ranging across eight of the ten provinces. And perhaps with one eye on the breath-taking condo boom over the past few years, he said that the downturn hit multi-family urban starts the hardest: they plunged 25%.

But there is a silver lining. There always has to be. Inventories of completed but unsold homes, particularly condos, have been piling up due to the slowing sales, and they’re “high compared to historical levels,” Dugan said. So this housing-starts debacle “is helping to gradually erode the inventory of completed and unsold units.” In other words, he hopes that dropping condo construction will help alleviate the inventory hangover from the condo construction boom – that one debacle will solve another debacle. And it will, eventually, but it won’t be pretty.

There is an unmitigated problem, however: housing starts in the metro area of Calgary, Canada’s fourth-largest city and its oil capital, plummeted 37.7% in February year-over-year, according to CMHC senior market analyst Felicia Mutheardy. Single-family detached starts dropped 17.5%, and multi-family starts – the infamous condos – crashed a stunning 53.6%.

January hadn’t been much better; and year-to-date, total starts in Calgary are down 40.8% from the same period a year ago, with single-family detached starts down 23% and multi-family starts down 52.1%. That puts home construction in Calgary at its lowest level since 2011.

Mutheardy explains:

In recent years, employment growth and net migration to the Calgary region have been strong, resulting in significant upward pressure on housing demand. Following a record year for total housing starts and existing home sales in 2014, new home production is expected to slow in 2015 due to weaker rates of job creation, moderating in-flows of migrants, along with increased supply in the competing existing home market.”

However, in January and February, the declines in monthly starts were quite pronounced, particularly for multi-family starts. Contributing to this has been larger than expected increases to existing home supply, offering buyers more options outside of the new home market, along with the currently low price of oil, which has impacted confidence levels.

So this “quite pronounced” decline in multi-family starts – a crash of over 50% year-over-year – comes on top of the “larger than expected increases to existing home supply.”

What really happened: January home sales in Canada dropped 2% from a year ago, the Canadian Real Estate Association reported in February. But in Calgary, home sales plunged 39% year-over-year to the lowest level in five years, while new listings jumped 37%, and inventory for sale skyrocketed by 103%.

We know from the US housing crash what this kind of misalignment turns into.

After years of froth, the Calgary housing market is now confronted with an oil bust. Employers are trying to get through it by cutting budgets, whittling down wages, imposing hiring freezes, and announcing layoffs. Alberta’s budget is in deep trouble. And reality – in form of very inconvenient gravity – is starting to pull on the once magnificent housing bubble. Blaming the weather isn’t going to cut it.

In the Oil Patch of the US, it has already started. “Restructuring” and “bankruptcy” are suddenly the operative terms. Read…  “Default Monday”: Oil & Gas Companies Face Their Creditors

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