UPDATE 2-Canadian housing starts slow in May as expected

Fri Jun 8, 2012 9:34am EDT

By Andrea Hopkins

TORONTO, June 8 (Reuters) - Canadian housing starts slowed as expected in May after a red-hot April, retreating to the average of the last six months in a sign the nation's bubbling housing market is beginning to cool, analysts on Friday.

The seasonally adjusted annualized rate of housing starts was 211,400 units, compared with a 243,800-unit pace in April, according to a report by the Canada Mortgage and Housing Corp. The April figure was revised down from 244,900 units reported previously.

The number of starts in May was just below the 212,000 median forecast of analysts in a Reuters poll.

"As anticipated, the pace of housing starts observed in April was not sustained in May. In fact, the pace in May was more in line with the average over the last six months," said Mathieu Laberge, deputy chief economist at CMHC.

"Although some ups and downs are likely to continue in the months ahead, the pace of housing starts should trend lower as the year progresses," Laberge said in a statement.

The slowdown was led by a decline in multiple-family urban starts, which fell 20.7 percent to a rate of 125,300 units, while urban single starts decreased 4.2 percent to 64,300 units.

The seasonally adjusted annual rate of urban starts decreased by 15.8 percent to 189,600 units in May.

Canada's hot housing market has sparked fears of a bubble, particularly in Toronto, Canada's largest city, where low interest rates have driven a condominium building boom and double-digit annual price increases in existing home sales.

While groundbreaking remains at a historically high level, May's slowdown in new home construction is likely the start of a cooling trend, economists said.

"Today's figure still leaves overall starts up 11.4 percent from the year-earlier level. Although starts are still running at a solid pace even with the latest month's largely-as-expected decline, we expect to see further signs of cooling as pent-up demand is exhausted with affordability issues constraining potential buyers," Peter Buchanan, senior economist at CIBC World Markets, said in a research note.

But David Tulk, chief Canadian Macro Strategist at TD Securities, said the housing starts series is a volatile one and he is not convinced even heightened rhetoric about household debt and hot housing from the Bank of Canada has the power to cool Canadian real estate amid ultra-low borrowing costs.

"Looking through this month-to-month volatility reveals a three- and six-month trend in headline starts at 223,000 and 213,000 respectively, both well above the demographically supported level of 180,000 annualized units," Tulk said.

"This fundamental momentum in construction activity is entirely consistent with a low interest rate environment motivating builders to accelerate new projects."

May's seasonally adjusted annual rate of urban starts decreased by 35.8 percent in Qu├ębec, by 18.3 percent in Ontario, and by 7.7 percent in the Prairies. Urban starts increased by 6.4 percent in Atlantic Canada and by 20.9 percent in British Columbia. In each region, the decrease or increase was mainly due to changes in multiple starts.

The Bank of Canada has kept the target for its overnight official interest rate at 1.0 percent in a bid to support economic growth amid global woes. While it has hinted higher rates may be on the horizon, many economists do not believe rates will rise until the fall of 2012 or well into 2013, leaving borrowing costs low for home buyers and builders.

"Simply put, the longer that the overnight rate remains at its exceptionally accommodative level, the greater the challenge the Bank will face in trying to manage the resulting increase in the housing market and household leverage," Tulk said.