September 11, 2012 / 12:27 PM / 5 years ago

Canada August housing starts surge unexpectedly: CMHC

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TORONTO (Reuters) - Canadian housing starts surged unexpectedly in August as a few large multi-unit projects in Toronto, presold in late 2010 and early 2011, broke ground, data from Canada Mortgage and Housing Corp (CMHC) showed on Tuesday.

The seasonally adjusted annualized rate of housing starts was 224,900 units in August, up from 208,000 units in July and well above the 200,000 average forecast of analysts in a Reuters poll.

CMHC revised down the July figure slightly from the 208,500 units it reported previously.

"Volatility in housing starts numbers is always to be expected, but this month's data clearly shows that Canadian housing construction remains in high gear," Jacques Marcil, senior economist at TD Economics, said in a research note.

"The rest of the economy is growing much slower and as a consequence is not likely to be able to support this level of housing supply for much longer," he said.

Economists at the CMHC agreed, saying the August increase was the result of a few big Toronto condo projects and weakness in July that made August appear stronger.

"This increase is primarily a reflection of the high level of pre-sales in some of these large multi-unit projects in late 2010 and early 2011, which is in line with job gains at that time," Mathieu Laberge, deputy chief economist at CMHC's Market Analysis Centre, said in a statement.

"Overall, moderation in housing starts activity is still expected for the remainder of 2012 and 2013."

A long run-up in Canadian house prices and a condominium building boom in Toronto and Vancouver have sparked some concern of a housing bubble.

But signs of cooling have begun to appear, with BMO Capital Markets economist Robert Kavcic pointing to a 22 percent drop in year-over-year Toronto condo resales in August as proof that stricter mortgage rules and weaker demand have begun to filter through to create a more moderate pace of residential construction activity.

"The August housing starts report told a familiar tale of strong multi-unit activity, particularly in Toronto," Kavcic wrote in a research note. "But the report is looking more like an historical artifact given that sales have begun to cool significantly -- look for a gradual softening in housing starts through 2013."

The CMHC report showed urban starts increased by 10.2 percent to 205,900 units in August. Urban single-family starts remained relatively unchanged at 64,300 units, while multiple urban starts increased by 15.5 percent to 141,600 units, the agency said.

Starts rose 47.5 percent in Atlantic Canada, 20.4 percent in Ontario, 18.2 percent in British Columbia and 1.3 percent in the Prairies. They dropped 9.8 percent in Québec.

"The higher level of starts recorded in Atlantic Canada and British Columbia in August reflects low levels of activity in July rather than an increasing trend that was registered in August," Laberge said.

The federal government has tightened mortgage lending rules four times in four years to try to prevent borrowers from taking on too much debt to buy into the market, but economists said the impact of those changes is still outweighed by historically low interest rates.

"While recent changes to mortgage insurance rules will likely limit the growth in demand for new homes, low interest rates remain an incentive for buyers to borrow and keep the housing market overvalued," Marcil said.

"In the end, higher interest rates are needed to bring the Canadian housing market back to a sustainable expansion pace. We expect the Bank of Canada to make that move in the spring of 2013."

Reporting By Andrea Hopkins; Editing by Jeffrey Hodgson; and Peter Galloway

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