Housing market cooling

In another sign the housing market is cooling, a dramatic plunge in applications for multiresidential construction sent the value of building permits issued in January below $6-billion for the first time since April, 2007.

It was the third straight month-over-month drop in permit values, which fell by 2.9 per cent to $5.9-billion in January, according to Statistics Canada. That compared with economists' expectations for a 1-per-cent gain. Multiunit permits were down the most, with a decrease of 26.9 per cent.

"It was a weak report, and it suggests building activity could cool a bit in the coming months. Given the slowdown in the U.S. and Canada, it's not surprising we're seeing some moderation from last year's breathtaking pace," said Millan Mulraine, economist at Toronto-Dominion Bank.

In 2007, building permits issued by Canadian municipalities hit a total of $74.3-billion, topping the record set the previous year by 12 per cent.

In January, residential building permits - which include both multi- and single-family units - dropped by 13.9 per cent. Non-residential building permits rose by 16.4 per cent.

Last year, rising construction costs caused a shift in favour of multiresidential over single-family units. But high prices are now causing a slowdown in consumer demand that is hurting both sectors, said Dawn Desjardins, senior economist at Royal Bank of Canada. "The persistent erosion in affordability in 2007 ... and tightening in credit conditions in recent months points to slower activity in 2008 following several years of very robust housing activity," Ms. Desjardins said in a research note.

Higher labour and materials costs have also been hitting the construction industry. Combined with slower growth and lower demand, this should squeeze builders' profits over the next five years, according to a recent report by the Conference Board of Canada.

However, Mr. Mulraine suggests people shouldn't read too much into the January permit numbers, which are highly volatile on a monthly basis.

Permit values are a leading indicator for construction activity. Mr. Mulraine says that if they increase over the spring, it would signal the building industry will regain steam this summer, he said.

Provincially, the largest gains in the value of issued building permits in January were in Ontario, Alberta and Quebec. Declines were largest in Saskatchewan and Newfoundland and Labrador, following big gains in their non-residential sectors in December.

(Lori McLeod/Globe and Mail)