October 15, 2012 / 5:43 PM / in 5 years

Canada housing market cools as household debt grows

OTTAWA (Reuters) - Canadian home sales fell sharply in September from a year earlier while households pile on debt and business sentiment slumps, according to downbeat data on Monday that suggested a struggle for growth in coming months.

A home is put up for sale in downtown Montreal, July 14, 2009. REUTERS/Shaun Best

Two reports on what policymakers say are the two biggest dangers to the Canadian economy - the hot housing market and high household debt - indicate a fairly sharp decline in house sales at a time when consumers are increasingly vulnerable to a sudden downturn in the value of their homes or a rise in borrowing costs.

House prices continued rising in September, but at a slower pace than in the past.

Separately, the Bank of Canada’s third-quarter survey of businesses showed sentiment weakened on issues such as hiring, investment intentions and sales.

The data feeds into the market view that the central bank should be in no hurry to raise interest rates despite the hawkish language it has used since April.

“Today’s numbers are consistent with our expectation that growth in coming quarters will average 2 percent or less, giving the bank little reason to think about acting anytime soon on its tightening bias,” said Peter Buchanan, economist at CIBC World Markets.

Canada’s export-reliant economy has recovered from the 2008-09 recession and still looks set to grow moderately this year and next.

But the European debt crisis and the spotty U.S. recovery have led to worries that the Canadian recovery will also be thrown off track.

The latest figures show that government efforts to avoid a U.S.-style crash in a housing market that has heated up at an alarming pace since the recession have had some effect.

Most analysts predict a soft landing for real estate, although some still fear a rough ride.

Sales of existing homes rose 2.5 percent in September from August, the first monthly gain since March, the Canadian Real Estate Association said. But year-over-year sales dropped by a sharp 15.1 percent.

CREA’s Home Price Index rose 3.9 percent in September, its smallest gain since May 2011.

The Canadian government introduced tighter rules on mortgage lending in July in an effort to cool the market, and CREA said the new rules have kept a lid on sales.

“While some first-time home buyers may no longer qualify for mortgage financing under the new rules, it is likely that many others are stepping back and reassessing how much house they can realistically afford, which is one of the things new mortgage rules were designed to do,” Gregory Klump, CREA’s chief economist, said in a statement.

Francis Fong, economist at TD Economics, said he did not expect any “precipitous decline” in housing activity, because interest rates were set to remain low.

“Rather, we expect a gradual unwinding of the imbalance in both sales and prices over the next few years,” he said.

NEW MORTGAGE RULES

Finance Minister Jim Flaherty has said he hopes the tighter mortgage rules will also throttle growth in debt, which has surpassed U.S. levels as home buyers take advantage of ultra-low rates.

But the household debt-to-income ratio rose in the second quarter - before the new rules came in - climbing to 163.4 percent from 161.8 percent in the first quarter, Statistics Canada said.

Historical revisions to the data to meet new international standards resulted in much higher ratios than previously reported.

The Bank of Canada survey showed senior managers were more cautious in the third quarter about making investments in machinery and equipment even though policymakers have been prodding them to put their cash to productive use.

Only 37 percent said they expected to invest more on machinery and equipment in the next 12 months while 29 percent expected to invest less. The difference between the two - the so-called balance of opinion - remained positive at eight but was sharply below the second-quarter balance of 24.

Bank of Canada Governor Mark Carney has chided corporate Canada for being overly cautious and sitting on piles of cash instead of spending it on equipment or technology to improve productivity.

Reporting by Louise Egan, Andrea Hopkins and Randall Palmer; Editing by Janet Guttsman; and Peter Galloway

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