Canada housing data suggests soft landing so far

By Andrea Hopkins

TORONTO (Reuters) - Canadian housing starts edged higher in March and building permits were weaker than expected in February, reports released on Tuesday showed, offering some reassurance that Canada's housing sector is simply cooling, not crashing.

While housing starts rose for a second straight month, all the strength was in the rural market - urban starts dropped sharply - and a longer-term trend showed construction is continuing to moderate, according to a report from government agency Canada Mortgage and Housing Corp.

Meanwhile, data from Statistics Canada showed the value of Canadian building permits rose a weaker-than-expected 1.7 percent in February as a sharp decline in plans for multi-family housing partially offset strength in other projects.

The reports furnished further evidence of a slowing in Canada's housing market, which was red-hot a year ago but has cooled dramatically since the government tightened mortgage rules in mid 2012 to prevent a U.S.-style real estate bubble.

"So far, so good on the soft landing in Canadian housing," BMO Capital Markets senior economist Robert Kavcic said in a research note, pointing out that starts have receded to just above levels seen two years ago.

"Starts have now bounced back in two straight months since January's deep decline, and the average for all of Q1 sat at a comfortable 177,100. That's ... in line with fundamental demand and probably right about where policymakers would like to see activity."

The seasonally adjusted annualized rate of housing starts was 184,028 units in March, up from 183,207 in February and well above the consensus forecast of analysts in a Reuters poll for 176,500.

But the monthly gain was entirely due to a 24 percent surge in rural starts to the highest level since 2010, a pace one economist said was not sustainable.

The six-month trend level in housing starts was 189,742 in March, continuing a downward slope that began in the middle of 2012, when Canada's robust housing market peaked.

The Conservative federal government tightened mortgage lending rules in July 2012 to cool the sizzling housing sector, its fourth such move in four years. The changes shortened the maximum mortgage length, making it harder for Canadians to take on too much debt to get into the expensive real estate market.

"We look for the level of housing starts to remain around this level for the balance of the year," Mazen Issa, Canada macro strategist at TD Securities, said in a research note.

"Slowing construction will also help limit the risk from an accumulation of inventory when interest rates inevitably move higher. Moreover, at these levels, the pace of construction activity is more in line with demographic fundamentals."

URBAN STARTS DOWN

The rise in the standalone monthly rate of housing starts was fueled by a surge in rural starts. Construction starts fell for urban single-detached houses and edged lower for multiple-unit urban starts, typically condos.

Urban starts fell 2.7 percent in March to 157,217 units, led by a 6.6 percent decline in single-family starts to 60,558 units. Multiple-unit urban starts were relatively unchanged at 96,659 units in March, CMHC said.

Separate data showed Canadian building permits rose 1.7 percent in February after a 1.8 percent gain in January. Market players had expected a February gain of 4.3 percent.

Permits for the nonresidential sector jumped 18.9 percent and residential permits fell 7.2 percent.

In line with the softening trend in the housing market since mid-2012, permits for multi-family housing fell 19.1 percent in February, the seventh decrease in eight months, Statscan said.

Permits for single-family houses rose a tepid 1.1 percent. Municipalities approved 14,071 new residential buildings in February, down 12 percent from January.

"Despite the earlier-released upside surprise in March housing starts, today's data confirm that homebuilding activity could continue to struggle in the months ahead, weighing on the overall economy," Emanuella Enenajor, economist at CIBC World Markets, said in a note.

(Additional reporting by Louise Egan in Ottawa; Editing by Janet Guttsman, Chizu Nomiyama and Peter Galloway)

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