WRAPUP 1-Canada's housing market cools, trade gap narrows

Thu Nov 8, 2012 10:56am EST

* Housing starts show market is cooling

* New home prices up for 18th month in a row

* Trade deficit narrows but export volumes sluggish

* Data points to slower economic growth, analysts say

OTTAWA, Nov 8 (Reuters) - Canadian housing starts fell more sharply than expected in October, according to data on Thursday that confirms a welcome slowing in the country's once-booming property market after the government repeatedly tightened mortgage rules.

Other data from Statistics Canada showed new home prices continued their modest rise in September while the trade deficit narrowed in that month on an oil-led export recovery.

Markets focused on the housing starts, which were down 8.9 percent from a year earlier as both single and multiple urban housing starts slumped, Canada Mortgage and Housing Corp (CMHC) said.

The seasonally-adjusted annualized rate of housing starts was 204,107 units in October, down from 223,995 in September and 18.9 percent below the cyclical peak reached in April.

"The October move was the most decisive one yet that a housing correction is under way," said Jonathan Basile, director of economics at Credit Suisse Canada.

Analysts polled by Reuters had forecast starts would decline to 211,500 in October.

The report echoes a string of data that the Canadian housing market is cooling, but does not appear to be heading for a crash landing as happened in the United States.

Housing prices and construction roared higher in 2011 and the first half of 2012, aided by low interest rates. The market started slowing after the government tightened rules on mortgage lending in July for the fourth time since 2008 in a bid to prevent home buyers from taking on too much debt.

The most scrutinized aspect of the CMHC report was the sharp drop in starts of multiple-family units, as analysts look for clues that overbuilding in the Toronto condo market is waning.

In urban areas, starts fell 10.1 percent at a seasonally adjusted annual rate, to 182,134 units in October. Urban singles starts decreased 7.6 percent while multiple urban starts dropped 11.4 percent.

"While multi-unit starts are extremely volatile month-to-month, this downshift to the lowest level since February could be an early indication that momentum is fading in the sector," said Robert Kavcic, economist at BMO Capital Markets.

While fading momentum is what policymakers hope for, it also means the housing market will not be as powerful a driver of economic growth as it was.

"The sector will likely remain a drag on growth through much of 2013, a stark shift from recent years," Kavcic said.

Prices of new homes in Canada rose for the 18th consecutive month in September, increasing by 0.2 percent from August and by 2.4 percent on the year.

EXPORTS

Canada's struggling exports are also expected to be a drag on growth in the third quarter as the trade deficit grew in volume terms even though it narrowed in dollar terms.

The trade deficit narrowed unexpectedly to C$826 million ($826 million) in September as exports increased by 1.9 percent while imports were unchanged. Canada's surplus with the United States grew to C$3.47 billion from a revised C$3.25 billion in August.

The overall increase in exports reflected a 4.2 percent jump in energy shipments, mainly crude oil and crude bitumen. But much of the export gain was due to price hikes, and export volumes were much less impressive.

"Today's report suggested that the hit to growth will likely be larger than previously estimated," said Dawn Desjardins, assistant chief economist at RBC Economics.

Imports were flat, with higher imports of metals and chemicals compensating for lower shipments of consumer goods and motor vehicles.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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