May 9, 2011 / 12:38 PM / 6 years ago

Soft condo sector drags on Canadian housing starts

<p>A condominium building under construction is seen in downtown Toronto, May 14, 2009. REUTERS/Mike Cassese</p>

TORONTO (Reuters) - Canadian housing starts unexpectedly slipped 3.1 percent in April, hurt by weakness in the condominium sector, the latest sign higher interest rates and new mortgage rules have cooled a recent property boom.

Starts slipped to a seasonally adjusted annualized rate of 179,000 units from a downwardly revised 184,700 units in March, Canada Mortgage and Housing Corp said on Monday. The median market forecast was for 185,000 units.

Canada’s housing market helped lead the country out of the recent recession as near-zero interest rates spurred a surge in prices and sales activity.

The boom worried the Canadian government enough to impose tighter mortgage rules twice in less than a year. The latest series, aimed at mortgage amortization and refinancing, came into effect last month.

Analysts predict the housing market will cool further in coming months thanks to the new rules and higher borrowing costs. The Bank of Canada hiked rates three times last year, which helped lift mortgage rates, and more increases are expected for 2011.

While the central bank targets inflation rather than asset prices, the moderating housing sector is seen giving it more room to hold off on resuming tightening.

“They don’t have to put on the brakes just yet in terms of raising interest rates in response to the housing market,” said Mazen Issa, macro strategist at TD Securities.

2011 RESALES FORECAST REVISED UP

April housing starts took a big hit from multiple-unit family dwellings, which include condominiums. The segment dropped 5.1 percent to 96,000 units.

Closely watched urban single-family homes rose 3.4 percent to 64,100 units in the month.

Scotia Capital economists said the rise in single-family homes was somewhat encouraging in that housing will not be as much a drag on economic growth as previously thought.

Regionally, urban starts were soft in Ontario and Quebec, while British Columbia, the Prairies and the Atlantic areas saw increases.

Rural starts were estimated at an annual rate of 18,900 units, down from 21,500 in March.

The housing news was not all glum. The Canadian Real Estate Association on Monday lifted its forecast for national sales activity, which it thinks will reach 441,100 units in 2011. This would still be a year-on-year decline of 1.3 percent.

The new estimate compares with the 1.6 percent year-on-year decline it forecast in February, which itself had been revised higher.

Much of the improvement is due to stronger-than-expected sales in British Columbia in the first quarter, the industry group said.

The surge in sales of multimillion dollar homes in the area has also prompted CREA to up its national average home price forecast as well. It now expects the average price to rise 4 percent to C$352,500 ($367,200), compared with February’s view of a 1.3-percent rise.

The industry group sees national sales rebounding next year with a 2.6 percent increase, given a healthier market in Ontario and Quebec and continued strength in British Columbia.

For 2012, CREA forecast national sales activity of 452,000 units, in line with the 10-year average. Prices are expected to rise 0.9 percent to C$355,800 next year.

($1=$0.96 Canadian)

Editing by Jeffrey Hodgson

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