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Housing slowdown weighing on economy

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Tags: Canadian GDP
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A slowdown in Canada's housing market is the latest drag on the country's overall economic growth, economists say.

Much of the unexpected 0.1-percent drop in economic output in August was a result of a sharp decline in the mining and energy sector. But economists say that in previous years the Canadian economy could rely on a strong housing market – and the construction and service-side jobs it supports – to boost the overall economy.

That support is vanishing, they warn.

Construction activity was down 0.1 percent in August, led by declines in both residential and non-residential building. Excluding June, residential construction has been on the decline since April. Non-residential building, meanwhile, has been falling since May.

"Residential construction appears to have peaked, which would not necessarily be a bad thing were it not for anecdotal evidence pointing to a sharp slowdown in new home sales," David Madani, an economist at Capital Economics, says in a note to clients. "This is particularly worrisome given the historically high level of multiple housing starts and excess inventory of unsold condo units. Despite low interest rates, we suspect that many investors are losing faith in Canada's overvalued housing market."

Activity among brokers and real estate agents is also waning, down 6.6 percent in August from the previous month -- marking the fourth consecutive month of declines and worse than the 1.6-decline recorded in July.

CIBC economist Emanuella Enenajor says the Canadian and U.S. housing markets are now moving in opposite directions.

"In contrast to the U.S., where housing construction is spurring growth and where an end to housing price declines is supporting consumer spending, the Canadian housing sector appears to be struggling to make new headway," she says in a note to clients. "The bleeding may have stopped in September, with resale activity ticking up that month based on CMHC preliminary data, although the sector will be hard pressed to contribute meaningfully to GDP growth given indicators of a slowdown underway."

What the overall impact of a housing pullback on the greater economy will be is still unknown, but economists warn that it could also lead to a slowdown in consumer spending, which has been resilient in Canada in the wake of the financial crisis.

The impact on economic growth comes amid increasing signs that the Canadian housing market is heading for a slowdown.

In July, Ottawa shortened the maximum mortgage amortization period to 25 years from 30 years and lowered the amount homeowners can borrow against their house to 80 percent from 85 percent, among other changes. Many real estate insiders are blaming the recent slowdown in sales – which have been particularly severe in Vancouver – on the recent rule changes.

But that slowdown, especially in the condo market, was what Finance Minister Jim Flaherty said he was looking for when he moved ahead with the new rules. He said the new rules were particularly aimed at the condo market.

"I have been listening to the market, and quite frankly I don't like what I hear ... Some calming of the market is desirable," Flaherty said at a conference when he announced the changes. "In Toronto in particular what I've observed and heard about from developers is continuous building without restriction because of persistent demand. This concerns me because it's distorting the market."

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