September 30, 2016 / 6:02 PM / a year ago

Cooler Canadian housing sector starts to drag on growth

OTTAWA, Sept 30 (Reuters) - Canadian economic growth got a big boost from oil production in July, but a slowdown in construction was in evidence as well, an early indication of the pain that could come with the end of the country's years-long housing boom.

With clear signs of cooling in Vancouver real estate, the most expensive market, and only Toronto still booming, some economists are braced for a hit to construction and real estate, which they warn could trickle into other sectors as consumers pull back.

The shift would follow a two-year slump in Canada's energy sector caused by plunging crude prices.

"It's one weakness replacing another," said Paul Ashworth, chief North America economist at Capital Economics.

"While it's not necessarily the case that the economy will get worse, it does mean economic growth will continue below its potential, the unemployment rate could edge up, and we'll be even longer without the recovery that the Bank of Canada expects."

Gross domestic product grew 0.5 percent in July, topping analysts' forecasts for a gain of 0.3 percent, Statistics Canada said on Friday.

But GDP would have been essentially unchanged without the 19 percent bounce back in non-conventional oil production that followed wildfire-related shutdowns in the spring.

By contrast, Canadian housing construction fell 1.8 percent in July, while output by real estate agents and brokers fell 1.0 percent in the month.

The GDP data for July also does not take into account the Vancouver slowdown that has followed the introduction of a 15 percent foreign buyer tax in the city, imposed in August.

Sherry Cooper, chief economist of Dominion Lending Centres, said the housing decline will go beyond residential construction, as the slowdown hits the income and spending of the real estate sector, mortgage brokers and banks and trickles into renovation and durable goods consumption.

To be sure, even as sales cool in Vancouver, prices continue to rise, and Toronto remains red hot, fueling continued concern among some that a bubble continues.

Cooper worries the slowdown could be worsened by the belated actions of policymakers looking for more ways to slow a market that many have labeled a bubble for years.

"What concerns me is the government seems to want to be proactive, and that's dangerous, because if they do too much in an environment where housing is already slowing, we could end up with much more of a slowdown than they really want," she said. (Reporting by Andrea Hopkins; Editing by Cynthia Osterman)

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