August 9, 2011 / 12:32 PM / 6 years ago

Housing starts climb unexpectedly in July

4 Min Read

<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 unexpectedly climbed 4.3 percent in July, setting third-quarter new home construction off to a strong start and maintaining its role for now as a key support to the economy.

Starts, elevated by a big jump in construction of multi-residential buildings such as condominiums, rose to a seasonally adjusted annualized rate of 205,100 units, Canada Mortgage and Housing Corp (CMHC) said on Tuesday.

That is up from a downwardly revised 196,600 units in June, which were originally reported at 197,400 units. The median forecast of 19 analysts surveyed by Reuters was for a modest decline to 196,000 starts.

"Detracting slightly from the headline's positive cast, this month's gain was concentrated in the multiples segment, which tends to have a lower valued added," said Peter Buchanan, senior economist at CIBC World Markets.

"Today's report and the recent resilience of both permits and sales suggest housing continues to be one of the economy's strongest sectors, although sentiment among purchasers obviously remains vulnerable to recent market turmoil."

Unlike the United States and many other developed countries, Canada's housing sector has been a strong source of support for the economy, helping draw it out of the recession.

Analysts credit low interest rates and banks still willing to lend. But they also warn that recent financial market volatility could hurt consumer sentiment and hit demand for new and existing homes.

However, the turmoil could also help to keep Canadian interest and mortgage rates lower for longer. Market expectations for Canadian interest rates, as measured by overnight index swaps, show traders have actually priced in the prospect of a rate cuts by year end.

The outlook has swung wildly in recent sessions. Traders pared back bets on rate hikes on Tuesday as world stocks put the brake on steep losses. Toronto's main stock index clawed back some of its near 9-percent drop over three sessions.

Housing Still Seen Softening

The housing numbers follow other July data that has delivered mixed signals, even as investors hope for signs of underlying strength following a sickly second quarter.

"While many economic indicators have pointed to much softer growth through the summer, Canadian housing starts is not one of them, still likely responding to a firm rebound in sales activity in the second half of 2010," said Robert Kavcic, economist at BMO Capital Markets.

But the overall pace of housing activity, from starts to resales, are seen slowing in the coming months, partly due to tighter mortgage regulations.

The seasonally adjusted annual rate of urban starts was led by a 13 percent jump in multiple urban starts, such as condos, to 120,200 units. CMHC said Ontario, British Columbia and the Atlantic region showed the most strength in the multi-residential sector.

Partly due to shifting demographics, Canada has seen a boom in condominium construction which has filled the skylines of its biggest cities with cranes.

But the closely watched measure of starts of single-family homes decreased 7.8 percent in July to 65,000 units.

Economists at IHS Global Insight noted single-family new construction activity was 22.2 percent below their level last year, compared with multi-family starts, which are now at their highest level since October 2008.

Rural starts were estimated at a seasonally adjusted annual rate of 19,900 units in July.

Editing by Jeffrey Hodgson

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