November 5, 2012 / 4:59 PM / 6 years ago

Canada housing seen slowing, building permits drop

TORONTO (Reuters) - The pace of homebuilding in Canada will continue to moderate in the last quarter of 2012 and into 2013, while existing home sales should hold steady and prices climb at or just below the inflation rate, Canada Mortgage and Housing Corp says.

The Toronto Skyline with a condominium building under construction (L) is shown in downtown Toronto, May 14, 2009. REUTERS/ Mike Cassese

The federal housing agency’s forecast on Monday for a weaker, but still healthy, housing sector echoed a string of data that has shown Canada’s recently red-hot real estate market cooling, but without signs of a crash landing.

“A weaker outlook for global economic conditions and the waning of the effect of pre-sales from late 2010 and early 2011, which contributed to support multi-family starts this year, will bring moderation in housing starts next year,” Mathieu Laberge, deputy chief economist at CMHC, said in the agency’s fourth-quarter outlook.

“Nevertheless, employment growth and net migration will help support housing starts activity going forward,” he added.

Canada’s housing market, which roared higher in 2011 and the first half of 2012 aided by low interest rates, started slowing after the government tightened rules on mortgage lending in July in a bid to cool things down and prevent home buyers from taking on too much debt.

Statistics Canada data released on Monday showed the value of building permits fell by an unexpectedly large 13.2 percent in September from August, dragged down by a major drop in the non-residential sector, but with housing permits holding steadier.

The overall fall in permits - the biggest since a 23.7 percent plunge in April 2011 - was far greater than the 3.0 percent decrease forecast by market operators. Statscan revised August’s advance to 9.5 percent from an initial 7.9 percent.

But the value of residential permits climbed by 0.4 percent after two monthly decreases. Single-family dwellings advanced by 3.4 percent, while multi-family dwellings dropped by 3.8 percent, suggesting some strength remains on the housing side.

“On the year, residential permits remain up 19 percent, highlighting the booming homebuilding sector that continues to thrive under a low-rate environment,” CIBC World Markets economist Emanuella Enenajor said in a research note.

Still, the tighter mortgage lending rules that took effect in July are expected to continue to help to rein in the market.

“Although the value of residential building permits increased slightly in September, the effect of tighter mortgage lending regulations announced by the government in July will likely put a damper on new residential construction over the near term,” Deutsche Bank economist John Clinkard said in a research note.

Permits in the non-residential sector plummeted 30.8 percent in September after increasing 27.7 percent in August. Industrial and institutional permits posted particularly steep drops.

In its quarterly outlook, the CMHC said housing starts will be in the range of 210,800 to 216,600 units in 2012, with the most likely outcome 213,700 starts. Homebuilding should slow further in 2013, with starts in the range of 177,300 to 209,900, and a most likely outcome 193,600, the agency said.

Economists at CIBC World Markets said last week they see a slowing in housing starts to 180,000 a year by 2014, down sharply from the 220,000 range today. In that scenario, the impact on growth in gross domestic product would be a drop of 1 to 1.5 percentage points, CIBC said.

The Bank of Canada has forecast economic growth of just 2.3 percent in 2013 and 2.4 percent in 2014.

The CMHC forecast existing home sales to slow to a range of 449,200 to 465,600 in 2012, with the most likely outcome of 457,400. In 2013, sales are expected to rise to 433,300 to 489,700, with the most likely outcome 461,500.

Price gains are expected to slow in 2012 but regain some strength in 2013. CMHC’s forecast for the most likely average price calls for a 0.2 percent gain to C$365,100 ($366,400) in 2012and a 1.5 percent gain to C$370,500 for 2013.

($1=$0.9965 Canadian)

Additional reporting by David Ljunggren in Ottawa; Editing by Peter Galloway

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