Canadian May housing starts suggest boost for economy

TORONTO (Reuters) - Canadian housing starts jumped much more than expected in May from April, the Canada Mortgage and Housing Corp said on Monday, in the latest sign that the broader economy is gaining momentum in the second quarter.

A builder works on the the roof of a new home under construction in the Montreal suburb of Brossard August 10, 2010. REUTERS/Shaun Best

The seasonally adjusted annualized rate of housing starts was 200,178 units in May, an increase from 175,922 in April. The April figure was revised upward.

Analysts polled by Reuters had expected 178,100 starts in May.

The housing starts data was the most recent report to suggest Canadian economic growth is picking up after struggling in the second half of 2012. A separate report on Friday showed the economy added 95,000 jobs in May, the second-biggest gain in 37 years.

With the pickup in starts, residential construction may contribute to Canadian economic growth in the second quarter for the first time in four quarters, wrote Krishen Rangasamy, senior economist with National Bank.


The six-month trend level in housing starts was 182,756 units, little changed from a month earlier, suggesting the downward slope in homebuilding since the middle of 2012 may be starting to level off.

“Multi-unit housing starts came storming back in May after falling precipitously through the winter months. Still, the 6-month trend in overall Canadian housing starts sits very close to demographic demand, further hinting at a soft landing,” Robert Kavcic, a senior economist with BMO Capital Markets, wrote in a note to clients.

Canada’s post-recession housing boom, fueled by record low borrowing costs, began to cool last year after Canada’s Conservative government tightened mortgage lending rules in July.

Those changes, prompted by fears a property bubble could be building, were the fourth such move since the financial crisis.

But the data on Monday showed segments of the market are still robust. The number of housing starts in cities increased by 14.6 per cent in May. Urban starts were led by a 22.2 per cent rise in multiple starts to a seasonally adjusted annualized rate 114,346 units. Condominiums are included in the multiple category.

The number of single homes started in cities increased by 3.0 per cent to 62,888 units in May.

The prospect of stronger growth gave a boost to the Canadian dollar, which firmed to C$1.0181 the U.S. dollar, or 98.22 U.S. cents immediately after the data. <CAD/>

Still, economists warned that given the extent of the post-crisis boom, tighter mortgage rules and the prospect of higher borrowing costs, the longer-term outlook for Canada’s housing sector was still tepid.

“With the 6-month moving average now more in line with the rate of household formation, May’s sharp jump in the pace of new home construction is unlikely to be sustained,” Dina Ignjatovic, an economist with Toronto-Dominion Bank, wrote in a research note.

“The overbuilding that has taken place over the last ten years could lead to new home construction falling below this demographic need for a period of time. This should, however, help to prevent further overbuilding and a consequential sharp correction in the housing market.”

Editing by Kenneth Barry