Home building eases to more sustainable level

OTTAWA—The Canadian housing sector appears to be settling to a sustainable level that will likely ease concerns about super-low interest rates triggering a housing bubble.

Canada Mortgage and Housing Corp. said Tuesday the seasonally adjusted annual rate of starts rose 6.5 per cent in February to 181,900 units, from 170,600 in January.

That is higher than analysts predicted, but still below levels a year ago.

On Monday, Statistics Canada reported that residential building permits declined a modest 0.9 per cent in value terms, but rose two per cent in terms of units — a mixed result that shows no sign of the strength that once had some analysts warning of a possible boom and bust in the sector.

“Canadian residential construction activity appears to be stabilizing at a level consistent with underlying demographic demand,” said economist Robert Kavcic of BMO Capital Markets.

“Look for starts to total an un-dramatic 179,000 units for all of 2011, the same pace seen over the past six months.”

CIBC’s Krishen Rangasamy said the number could even fall further, particularly if interest rates rise later this year.

Economists have long expected the housing market, which had been on a tear coming out of the 2008-09 recession, to slow as pent-up demand was satisfied and interest rates rose in mid-2010 from all-time lows.

But due to the weak recovery, the Bank of Canada has had to keep rates low by historical standards longer than anticipated, raising fears that new home buyers may be taking on greater debt than they can afford long-term.

Earlier this year, Finance Minister Jim Flaherty tightened mortgage eligibility rules for the third time in just over two years in an attempt to head off a bubble.

The housing market data of the past few months suggests the warnings and measures taken by government are having an effect.

February’s gain in starts was due primarily to increased activity in the multi-family starts in Ontario and the Prairies, CMHC said.

The seasonally adjusted annual rate of urban starts increased by 9.4 per cent to 161,000 units in February. Urban multiple starts were up by 14.5 per cent in February to 94,900 units, while single urban starts edged higher by three per cent to 66,100 units.

Rural starts were estimated at a seasonally adjusted annual rate of 20,900 units in February.

In a note, Scotiabank economists Derek Holt and Gorica Djeric said February’s stronger than expected numbers don’t point to a renewed surge in the market, noting that the big increase was in the construction of multiple dwellings which have less value-added than single dwellings.