Canada State-Owned Mortgage Insurer Projects Housing Starts to Slow by 2019 -- Update

The Canada Mortgage and Housing Corp., the state-owned housing insurer, expects Canada's booming housing market to slow in the next two years, according a new outlook issued Thursday.

Slowing economic growth and rising mortgage rates will cause housing starts to drop by 2019, compared with this year, and existing home sales will also likely fall, said the outlook. Meanwhile, price increases will moderate, the CMHC said.

For the past two years, Canada's housing market has been experiencing what many call bubble-like conditions, particularly in Vancouver and Toronto. The CMHC's outlook Thursday suggests that the peak of the housing market may have passed.

Mortgage rates have been rising lately as the country's central bank raises borrowing costs, which will "restrain" existing home sales and dampen price increases, the CMHC said.

Average home prices rose almost 11% in 2016, and could rise another 4.3% this year, based on the agency's top-range forecast. While increases will likely continue in 2018 and 2019, prices could only rise 0.16% in 2018 and 2.4% in 2019, according to the top range of CMHC forecasts.

Declining starts and slowing price increases partly reflect attempts by the Canada's banking watchdog, the Office of the Superintendent of Financial Institutions, and the provinces of British Columbia and Ontario, to take the air out of booming markets.

The CMHC's forecast of lower starts is "certainly partly a reflection of policy," said Bob Dugan, the CMHC's chief economist. "There's a bit of cooling in demand."

In a separate assessment of current conditions, also issued Thursday, the CMHC noted "a degree of vulnerability at the national level, due to moderate overvaluation and price acceleration."

The agency cited housing markets in Toronto and Vancouver as "highly vulnerable," and cautioned about overbuilding in Calgary and Edmonton and in St. John's, Newfoundland. The agency cited a growing backlog of new and unsold homes in those cities.

Nationally, the agency expects housing starts to range between 206,300 and 214,900 this year, but then fall to between 192,300 to 203,800 units by 2019.

The CMHC said it expected Canada's GDP to grow between 2.4% and 3.2% this year, but drop to between 1% and 2.4% by 2019. Meanwhile, immigration, which has been close to record levels in 2016, should fall back to more normal levels, which could reduce demand for housing.

The agency warned that its forecasts could be thrown off if interest rates or unemployment rates jumped more than expected. Meanwhile, it said price increases in major markets in Vancouver and Toronto are outpacing income and population growth.

"This adds considerable uncertainty over how the housing market will adjust to these imbalances," the CMHC said.

Write to Vipal Monga at vipal.monga@wsj.com

(END) Dow Jones Newswires

October 26, 2017 15:08 ET (19:08 GMT)