April 8 (Bloomberg) -- Declines in housing starts and building permits data suggest Canada is headed for the soft landing in real estate that policy makers have forecast, damping concern that a rapid fall in home prices could hobble the world’s 11th-largest economy.
Home construction dropped 18 percent in March to the lowest annual pace since the 2009 recession, Canada Mortgage & Housing Corp. said from Ottawa today. Residential building permits also dropped 21 percent in February from January’s record high, Statistics Canada said in a separate report.
Bank of Canada Governor Stephen Poloz has said the housing market is heading for a “soft landing” with consumer debts as a share of income stabilizing around record highs. The International Monetary Fund said today that house prices and household finances remain a “key vulnerability” for Canada.
Real estate is “not crashing like some were expecting but sales demand is a bit more subdued,” said Robert Kavcic, a Bank of Montreal senior economist in Toronto. “I don’t know if it’s a bad thing; it’s what policy makers want to see.”
The drop in housing starts to an annual pace of 156,823 units in March will help bring construction to the 180,000 annual rate that is needed to fulfill demand from population growth, Kavcic said.
Today data showed sharp declines for multiple-unit housing, which has been the focus of policy-maker concern, particularly in Toronto and Vancouver. Construction starts on urban multiple-unit housing fell 26 percent in March, while the value of building permits fell 32 percent in February.
The Canadian dollar pared gains after today’s reports. The currency rose to 1.094 per U.S. dollar at 10:35 a.m. in Toronto, 0.3 percent stronger than late yesterday, after climbing as much as 0.5 percent. One Canadian dollar buys 91.37 U.S. cents.
Poloz has said his next move in the central bank’s 1 percent overnight interest rate will depend on the evolution of economic data and the risks posed by consumer finances and weak exports. The Bank of Canada is counting on business spending to drive economic growth, making up for a moderation in housing.
The drop in starts “highlights the downside risks surrounding homebuilding after a decade-long run-up,” Toronto-Dominion Bank economist Connor McDonald wrote in a research note. “Weaker construction activity, along with general fatigue in domestic spending, will inevitably put more pressure on net exports to drive the next stage of Canada’s economic recovery.”
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