Canada's June housing starts rise as Ontario remains hot

By Andrea Hopkins

OTTAWA (Reuters) - Canadian housing starts rose more than expected in June as construction plans in and around Toronto remained strong, but Vancouver trended downward, data from the Canada Mortgage and Housing Corp showed on Tuesday.

While parts of Canada's hot housing market have started to cool, June's homebuilding activity pushed the six-month starts average to its highest in nearly five years. The strong growth is one reason the Bank of Canada is widely expected to raise interest rates on Wednesday.

The seasonally adjusted annual rate of starts rose to 212,695 in June from May's upwardly revised 194,955. Economists had expected a rise to a 200,000 annual rate.

"Strength in residential investment was a reason for a strong first quarter, and the recent readings in starts suggests that homebuilding will continue to be a solid growth contributor for 2017 as a whole," CIBC World Markets economist Nick Exarhos said in a research note.

While Toronto home sales fell in June for the third consecutive month on fears that a long boom had passed its peak, cities in that province, Ontario, continued to fuel the overall national rise in housing starts.

Ontario starts soared 47 percent, while those in Quebec gained 30 percent. A recent cooling in British Columbia continued, with starts down 19 percent, noted Krishen Rangasamy, senior economist at National Bank Financial.

"Canada’s real estate market remains hot despite tighter rules implemented by governments at both the federal and provincial levels," Rangasamy said in a research note. "The rebound in June housing starts to well-above demographic needs is a case in point.

"In that context, tomorrow’s expected tightening of monetary policy by the Bank of Canada is welcome."

Economists expect the central bank to raise interest rates as early as Wednesday after cutting them twice in 2015 to counter an oil price shock that sideswiped Canada's economy.

The recent dramatic drop in home sales in Toronto, Canada's largest housing market, has triggered fears of a housing crash but other markets are showing strength, and Vancouver, the second-largest market, has recovered after a softening in mid-2016.

Still, Exarhos said housing starts were bound to cool in the year ahead after defying expectations for a slowdown for years.

"A softening in (building) permit activity, and a smaller backlog of unused permits, signal that there won't be much upside for starts from here," Exarhos said.

(Reporting by Andrea Hopkins; Editing by Lisa Von Ahn)