Canadian Housing Data Bolster Poloz ‘Soft-Landing’ Thesis

Canadian data suggest momentum is gradually slowing for home prices and construction, supporting policy maker statements the nation’s C$2.03 trillion ($1.87 trillion) housing market will avoid a crash.

Statistics Canada said today its new home price index was unchanged in November, trailing the 0.1 percent median forecast in a Bloomberg survey with six responses. From a year earlier, new home prices increased 1.4 percent, the slowest pace since February 2010. Home starts and building permits declined.

Bank of Canada Governor Stephen Poloz said in an interview last month he expects a “soft landing” in the housing market after historically-low interest rates enticed home buyers to load up on debt, now at a record relative to income. Finance Minister Jim Flaherty, who warned about signs of overbuilding in Toronto and Vancouver condominiums, said this month dangers to the Canadian economy from elevated housing prices and high consumer debt levels are receding.

“Going into 2014, the housing sector is much less likely to be the sector of growth that we’ve seen in previous years,” Stefane Marion, chief economist at National Bank Financial in Montreal, said in a telephone interview, adding he’s not concerned about a crash.

Low Defaults

“We would need some type of shock, such as a significant backup in interest rates or some bubble-like conditions in the housing market reminiscent of what we saw in the U.S., but that’s not what we’re seeing.” Marion said. “It’s not the conditions that prevailed in the U.S. in 2007. The default rates are extremely low.”

Building permits fell 6.7 percent in November to C$6.75 billion, Statistics Canada said today in Ottawa, with projects such as apartments and condominiums dropping 8.7 percent. Urban multiple-unit housing starts fell 4.1 percent in December to an annual pace of 108,910, Canada Mortgage & Housing Corp. said.

Rising mortgage rates will crimp affordability, damping growth in the housing market this year, according to Toronto-Dominion Bank economist Diana Petramala and Royal Bank of Canada economist Laura Cooper.

Yields on five-year government bonds that are used as a benchmark for mortgage rates climbed to 1.89 percent today from the 2013-low of 1.15 percent in May, as the Federal Reserve moves to scale back extraordinary monetary stimulus.

Losing Steam

“Interest rates in Canada and the U.S. will likely continue to gradually increase through 2014 and 2015, taking some steam out of demand for Canadian housing,” Petramala wrote in a note to clients.

Housing starts fell 4.1 percent in December, marking a decline in the average rate for 2013 of about 13 percent to about 188,000 units, the lowest since 2009. Starts will decline to 182,000 units this year and 174,000 units in 2015 according to Cooper at Royal Bank.

“We anticipate that housing affordability pressures will increasingly weigh on housing demand,” she said.

Petramala forecasts that housing starts will decline to a rate of between 165,000 and 175,000 units through 2015, while Bank of Montreal senior economist Robert Kavcic forecasts 180,000 units this year.

The permits report showed broad weakness with single-family permits falling 6.7 percent and non-residential work down 5.2 percent to C$2.66 billion, led by a 32 percent drop in institutional projects.

Construction intentions remain strong in Vancouver, with British Columbia the only province to record a gain in residential permits. The total value of building permits in the province’s largest city rose 25.8 percent to C$691.1 million, led by multiple-unit housing, Statistics Canada said.

Even with a decline in permits for multiunit housing in November to C$1.88 billion, the total remained 25 percent above the year-earlier level.

Inflation Backdrop

“You need to see labor markets in extremely weak conditions to precipitate a significant decline in home prices, or a sharp increase in interest rates,” said National Bank’s Marion. “With this inflation backdrop we have right now I just don’t see that happening.”

Consumer prices rose 0.9 percent in November from a year ago, holding below the 1 percent floor of the central bank’s target band for a second straight month, Statistics Canada reported Dec. 20.

The agency, which reports labor-market figures tomorrow from Ottawa, said last month the jobless rate held at 6.9 percent in November, the lowest since 2008, with employers adding an average of 13,500 jobs a month in 2013.

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