Canadian housing starts, permits drop as market cools

Reuters

* Housing construction drops, expected to cool long term

* Economists note monthly volatility, frigid winter weather

* Overall housing market seen slowing after long boom (Adds price data by Royal LePage, paragraphs 10-12)

By Andrea Hopkins

TORONTO, April 8 (Reuters) - Canadian housing starts fell more than expected in March and building permits dropped sharply in February, according to data released on Tuesday that suggests the country's robust housing market is cooling.

Volatility in the housing data and an especially hard winter may explain some of the unexpected weakness in the data, economists said. But the figures still bolstered expectations that home building was starting to slow after a boom that observers have warned is unsustainable.

"The steep decline in housing starts in March was at least partly weather related, but the bigger picture is an ongoing cooling of residential construction activity in Canada," BMO Capital Markets senior economist Robert Kavcic wrote in a research note.

Housing starts fell 17.7 percent in March to a seasonally adjusted annualized rate of 156,823 units, well below an economists' forecast for 191,000 units.

February's housing starts were also downwardly revised to 190,639 from the 192,094 originally reported, Canada Mortgage and Housing Corp (CMHC) said.

A separate report from Statistics Canada showed the value of building permits tumbled by 11.6 percent in February from January as construction intentions for multifamily homes fell sharply and in every province.

The decline was steeper than the 2.7 percent drop forecast by analysts in a Reuters poll and followed an 8.1 percent increase in permits issued in January.

Canada escaped the U.S. housing crash that accompanied the 2008-09 financial crisis, and home prices have risen sharply, if not steadily, in the past five years despite moves by the federal government to tighten mortgage lending rules.

While some economists have predicted the Canadian market will crash, most have said they expect sales and new construction to level off in 2014 and 2015 as mortgage rates rise, with prices continuing to tick slowly higher.

A third report released on Tuesday showed the average price of a home rose between 2.5 percent and 5.4 percent in the first quarter of 2013 compared with the same period in 2013.

The average price of a two-story home rose 5.4 percent to C$428,943 ($392,500), while detached bungalows were up 4.4 percent to C$380,765 and condo prices rose 2.5 percent to an average C$252,174, according to Royal LePage, one of Canada's largest realty companies.

"It appears that it took only the slightest hint of spring to bring home-sellers out of hibernation," Phil Soper, president and chief executive of Royal LePage, said in a statement.

"We are finally seeing the arrival of housing inventory in seasonally appropriate quantities across the nation. When combined with pent-up demand following a particularly long and harsh winter, the stage is set for a robust 2014 spring market."

CONSTRUCTION COOLING

Some of the big drop in March housing starts was shrugged off as being weather-related and yet another bump in housing data that has been seen as unsteady.

"While we expected a slowdown in residential construction going forward, such a dramatic move month-on-month brings us below a pace that would be in-line with household formation," CIBC World Markets economist Nick Exarhos wrote in a research note.

"Given the volatile nature of the series, we wouldn't be surprised to see some of this lost ground recouped over the coming months."

The CMHC has urged analysts to focus on the six-month trend of housing starts as a better gauge of activity because it lessens the impact of large monthly swings in condo construction. The six-month trend slipped to 184,476 units in March from 191,126 in February, the first time starts have been below 190,000 in six months.

"Lower starts activity over the remainder of the year compared to 2013 is anticipated as builders continue to adjust activity in order to manage inventory levels," Mathieu Laberge, deputy chief economist at CMHC, said in the report.

Starts of multiple-unit dwellings, typically condos, plunged 26 percent in March.

David Tulk, chief Canada macro strategist at TD Securities, said the volatility in the series should not overshadow the signs of a slowing housing sector, even if home-buying ramps back up in the spring as expected.

"Returning to our longer-term view, while existing home sales may perk up in the spring as pent-up demand from a dismal winter is released amid a recent decline in mortgage rates, construction activity is not expected to see as much of a sustained rebound," Tulk wrote in a research note.

"As interest rates drift higher over the course of the year, it is expected that the longer-term trend in housing starts will ease in keeping with the wider and very familiar theme of a cooler domestic economy."

Building permits for residential dwellings, closely watched for signs the housing market is cooling, fell 21 percent in February from a record high value in January.

The percentage drop was the biggest since January 2009 although the value of the residential permits, at C$3.6 billion ($3.3 billion), matched levels last seen in February 2013.

Permits for multi-family dwellings plummeted 31.5 percent, again the biggest drop since 2009, with the provinces of Quebec, British Columbia and Alberta showing the biggest decreases. Permits for single-family homes fell 12 percent, pulled down mostly by Alberta, Ontario and British Columbia.

The value of nonresidential building permits gained 6.6 percent in February after a 15.4 percent decline in January. Permits rose 14.9 percent for institutional buildings, 26.8 percent for industrial buildings and were down 0.3 percent for commercial buildings.

($1=$1.09 Canadian) (Additional reporting by Leah Schnurr in Toronto, and Louise Egan and Alex Paterson in Ottawa; Editing by Peter Galloway and Cynthia Osterman)

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