March 8, 2011 / 1:22 PM / 7 years ago

Canada housing starts up but condo strength to unwind

TORONTO (Reuters) - Canadian housing starts rose a better than expected 6.6 percent in February from January, thanks to a jump in condominium construction, though analysts warned the strength is unlikely to carry into coming months and could be a mild drag on overall economic growth.

Housing starts climbed to a seasonally adjusted annualized rate of 181,900 units in February from a revised 170,600 units in January, Canada Mortgage and Housing Corp said on Tuesday. January starts were revised up slightly from 170,400.

Analysts, on average, had forecast 173,000 starts in February.

“The details reflected somewhat of a lack of breadth, so we discount the strength on volatility concerns and are not convinced this is a sustainable break from a lower trend,” wrote Scotia Capital economists Derek Holt and Gorica Djeric.

Urban starts rose by 9.4 percent to 161,000 units, CMHC said, driven by a 14.5 percent rise in construction of multiple-unit buildings, mainly condominiums, accounting for 94,900 units.

Analysts said strength in the condo market may not continue as there has been a recent drop in building permits issued for the sector. CABPER=ECI

The closely watched single-family homes segment edged 3.0 percent higher to 66,100 units in February.

Despite the month-to-month swings in the volatile multi-unit group, the underlying trend suggests housing starts are averaging 176,000 units a month.

“Activity appears to be stabilizing around a level consistent with demographic demand,” said Robert Kavcic, economist at BMO Capital Markets.

Compared with global trends in the face of the financial crisis, Canada’s housing market has been resilient, due mainly to a strong banking system and low interest rates. After a brief retreat during the crisis, the residential housing sector was able to post double-digit price gains in late 2009 and early 2010.

But Canada’s economic recovery is now seen depending less on consumer-driven growth and more on business and export growth. Analysts expect that a rise in interest rates later this year and tighter mortgage rules will combine slow the housing sector.

“We continue to expect a softening in overall housing starts, particularly with the anticipated higher interest rates and a slower second half of the year, keeping home prices under wraps,” said Krishen Rangasamy, an economist at CIBC World Markets.

Atlantic Canada saw the biggest decline in urban housing starts in February with a 24.7 percent drop, CMHC said, while Quebec followed with a 7.1 percent fall. British Columbia was down 5.9 percent.

Urban starts increased by 29.3 percent in Ontario and by 26.1 percent in the Prairie provinces.

Rural starts were estimated at a seasonally adjusted annual rate of 20,900 units in February.

Reporting by Ka Yan Ng; editing by Rob Wilson

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