Record Canadian housing construction led a faster-than-expected gain in building permits in January, government data showed as the central bank said any further housing stimulus could bring “trouble.”
The value of residential building permits granted by municipalities jumped 26.3 percent to C$4.60 billion ($4.18 billion), Statistics Canada said today from Ottawa. One of the largest municipal gains was led by multiple-unit housing in Vancouver, a market that policy makers have said is most at risk from overbuilding.
Bank of Canada Deputy Governor John Murray today said the country will probably avoid housing crashes that happened in the U.S. and U.K., citing the stability of Australia where consumer debt burdens are higher than Canada. Consumer spending brought Canada through the worst of the 2008 global financial crisis as banks avoided collapse while low interest rates and government stimulus boosted debt-fueled home buying.
“The household sector is now largely played out; pushing it much further could lead to trouble,” Murray said. “Although countries such as the U.S. and the U.K. have experienced sharp and painful corrections at comparable debt and price levels, leading to much more serious economic and financial consequences, it would be a mistake to assume that a similar outcome is therefore inevitable in Canada.”
The Canadian dollar strengthened, rising 0.5 percent to C$1.0972 per U.S. dollar at 12:29 p.m. in Toronto. One Canadian dollar buys 91.14 U.S. cents. The increase in permits was followed by a report showing a gain in the Ivey purchasing manager index to 57.2 in February from 56.8 in January.
The central bank forecast for a soft landing conflicts with Pacific Investment Management Co., which says home prices may fall as much as 20 percent in the next five years.
“Canadian housing is overvalued,” Ed Devlin, the London-based head of Pimco’s Canadian portfolio, said by telephone March 3. “I would expect to see it happening at the end of this year, we’re going to start to see housing roll over.”
Pimco has been reducing its holdings of Canadian debt after a run of strong profits, Devlin said. The housing decline will lead to a pullback in consumer spending, capping economic growth this year in Canada around 2 percent, he said.
Non-residential permits fell 14.6 percent to C$2.39 billion in January, Statistics Canada said today. That reduced the gain in total building permits to C$6.99 billion, a rise of 8.5 percent. Economists forecast total permits would climb 1.7 percent, according to the median of the nine responses to a Bloomberg survey.
Vancouver building permits rose 30.5 percent in January to C$627 million. It was one of the largest gains by city, along with Toronto and the Alberta capital of Edmonton, Statistics Canada said in its report.
Permits for multifamily housing projects such as apartments and condominiums jumped 42.8 percent to C$2.10 billion, Statistics Canada said. Single-family housing permits rose 15.0 percent to C$2.50 billion.
The housing market may still slow if mortgage interest rates increase or if builders cancel projects because they see signs of overbuilding, said Robert Hogue, senior economist at Royal Bank of Canada in Toronto.
“At this stage we don’t need that many more units being started, because lots of them will be delivered over the next couple years,” he said in a telephone interview.