June 8, 2011 / 12:34 PM / 6 years ago

May housing starts up more than expected

<p>Builders work on the the roof of a new home under construction in the Montreal suburb of Brossard, August 10, 2010.Shaun Best</p>

TORONTO (Reuters) - Canadian housing starts rose in May to a higher-than-expected seasonally adjusted annual rate of 183,600 units, boosted by a pickup in condominiums and other multi-unit buildings.

May starts topped the median forecast of analysts, which had called for 183,000 starts. April starts were revised slightly lower to 178,700 units from 179,000 units, Canada Mortgage and Housing Corp said on Wednesday.

Unlike the United States, Canada's relatively healthy housing sector played a key role in pulling the economy out of its recent recession. But growth has cooled following last year's interest rate hikes and the introduction of tighter mortgage rules.

CMHC, a government agency, said May starts increased modestly due to an increase in multi-unit construction in most provinces and higher starts in rural areas.

This was partly offset by fewer new single-family homes, which typically have a bigger economic impact.

The report provides "some support to economic growth. However, all of the strength was in the multi-family segment as single starts declined on the month suggesting that the lift to growth will be modest," Scotia Capital economists Derek Holt and Karen Cordes Woods said in a note to clients.

"The trend remains pointed downwards as tighter mortgage regulations, record high prices and high levels of homeownership continue to limit demand for new homes, likely resulting in a more moderate pace of growth for home prices."

Canadian housing prices and sales surged shortly after 2008 financial crisis, boosted by near-zero interest rates and ultra-low mortgage costs. Canadian banks also exited the crisis relatively unscathed and were able to continue lending.

By contrast, recent data showed U.S. single-family home prices dropped in March to fall below the low hit in April 2009 during the financial crisis.

HIGHER RATES AHEAD MAY BITE

Canada's housing boom worried the Canadian government enough to impose tighter mortgage rules, with latest changes aimed at mortgage amortization and refinancing coming into effect earlier this year.

The report on Wednesday showed some signs of weakness. While urban multiple starts were up by 4 percent from a month earlier to 100,000 units, single urban starts decreased by 4.1 percent to 61,000 units. Rural starts were estimated at 22,600 units.

"Since singles contribute more to GDP per unit than do multiples, that's not necessarily a good report in term of the contribution of construction to the economy in May," CIBC World Markets economist Krishen Rangasamy said in a note.

"Housing starts and building permits reached a cycle peak of around 200,000 back in Q1 of last year and since then the trend has been a slowly declining one, despite a low interest rate environment."

Rangasamy noted that housing starts were in the 200,000 to 250,000 range before the recession and warned starts could soften further this year given the prospect of higher interest rates.

A Reuters poll this month showed Canada's central bank is expected by many to resume its rate-hike campaign in September.

Regionally, urban starts increased by 33.3 percent in the province of British Columbia, 13.5 percent in Quebec, 11 percent in the Atlantic region, and by 10 per cent in Alberta, Saskatchewan and Manitoba. Ontario posted a decrease of 22.9 percent.

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