WRAPUP 3-Canada's hot housing market shows signs of cooling

Thu Aug 9, 2012 10:59pm IST

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* Housing starts slow more sharply than expected in July

* New home prices up for 15th month in a row in June

* Analysts see further market cooling late in 2012

By Andrea Hopkins

TORONTO, Aug 9 (Reuters) - Canada's hot housing market showed signs of cooling on Thursday as July housing starts slowed more sharply than expected, but housing prices were still climbing in June and analysts said a real slowdown may not come until late in 2012.

Groundbreaking on new homes fell to a seasonally adjusted annual rate of 208,500 units in July, according to the Canadian Mortgage and Housing Corp, a sharp slowdown from the 222,100 units in June and below the forecasts of analysts in a Reuters poll, who had expected 213,300 starts.

It was the first time in seven months that the rate of starts fell below the six-month trend, and a government decision to tighten the rules for mortgage lending, starting in July, was expected to contribute to further slowing as 2012 draws to a close.

"We do expect that the impact of tighter mortgage regulations announced in late June will slow housing demand, but the impact on the construction and starts data is unlikely to show up until later in the year," David Tulk, chief Canada macro strategist for TD Securities, said in a research note.

The hot market had sparked fears of a bubble, particularly in Toronto, Canada's largest city, and in Vancouver, as low interest rates fueled condominium building and double-digit annual price increases for existing homes.

The bulk of the pullback in July housing starts came in the multiple unit segment, where starts in the volatile condo market in British Columbia declined. That was in line with earlier data that has shown cooling in the Vancouver real estate market.

Multiple unit starts dropped 7.6 percent to 123,000 annualized units, the lowest level since February. Single unit starts fell 4.0 percent to 64,000 annualized units.

The slowdown in July pushed starts below the average for the second quarter and suggested the housing sector may not drive Canadian gross domestic product growth for much longer.

While momentum has cooled in recent months, BMO Capital Markets economist Robert Kavcic noted year-to-date starts now average almost 216,000 units, well above household formation of about 180,000.

"Canadian housing starts, particularly the multi-unit sector, have ebbed from extremely robust spring levels," Kavcic wrote in a research note. "With stricter mortgage rules likely to cool demand in the remainder of the year, construction activity should moderate further to a more sustainable pace."

Mindful of the U.S. housing boom that was left unchecked until it burst, the Canadian government's move to tighten conditions for homebuyers and mortgage lenders was a bid to deflate a possible bubble before it pops.

But a slowdown will have broad implications for Canada's tepid economic growth, which has relied on the housing sector to offset slowing exports.

"The July lower-than-Q2 numbers represent the possibility that housing could fade out of the picture as a positive contributor to quarter-over-quarter GDP in the third quarter and even drag on growth, contingent on how the rest of the quarter shakes out," Scotia Capital economists Derek Holt and Dov Zigler said in a research note.

PRICES STILL CLIMBING

Prices for new homes were still rising in June, however, data from Statistics Canada showed on Thursday, up by 0.2 percent in that month on continued strength in large cities such as Toronto and Calgary. It was the 15th consecutive month-on-month increase.

The advance matched market expectations and follows the 0.3 percent month-on-month-gain in May.

Prices in Toronto, which accounts for 26.6 percent of the entire market, rose 0.3 percent in June, while prices in Calgary, where the booming energy industry has fueled demand, were up by 0.5 percent.

New housing prices rose in 13 metropolitan regions, were unchanged in six and fell in two. Prices in June 2012 increased by 2.3 percent from June 2011. The year-on year advance in May was 2.4 percent.

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