TORONTO - The pace of housing starts unexpectedly surged in April, mainly due to an increase in construction on urban apartments and condos, areas of the housing market that some analysts fear are already too hot.
Canada Mortgage and Housing Corporation said Tuesday that housing starts rose 14 per cent to 244,900 units on a seasonally adjusted annual basis last month, compared with 214,800 in March.
The seasonal adjustment irons out seasonal variations and calculates an annual number as if the April pace were to continue for 12 months.
The number of starts in April far more robust than the decline to a rate 204,000 units that economists had expected.
There were just over 21,000 actual starts in April, CMHC said.
"This is an important report: There’s little question now that Canada’s residential construction sector is heated, with the big-city condo market boasting the highest temperature," said Bank of Montreal economist Robert Kavcic.
Multiple urban starts —on buildings like apartments and condos — increased by 27.4 per cent to 158,500 units. That was the highest level on record since 2007, Kavcic said.
The CMHC said the strong pace in April was fuelled by demand late last year.
"The increase in this segment is partly a reflection of the high level of pre-sales in large, multi-unit projects since 2011, which is in line with job gains over the last year," said Mathieu Laberge, deputy chief economist at CMHC's Market Analysis Centre.
Construction on urban single-family homes was up modestly, rising 0.6 per cent to 67,700 units.
In a sharp contrast to the robust activity in urban centres — up 18 per cent year over year — construction on rural homes fell by 19 per cent to 18,700.
The housing market has been driven by historically low interest rates, which appears to be continuing to fuel the robust building pace despite economists' expectations of some softening.
Super-low mortgage rates and high demand have driven housing sales and prices higher, especially in large urban centres such as Toronto and Vancouver, particularly in the hot condo market.
However, CMHC has said the condo trend is not sustainable and many analysts agree.
Some economists have warned this frenzied pace of building could leave a glut of supply on the market if demand weakens.
Kavcic said the market, especially in the multi-unit sector in an few major cities, is at risk of overheating.
"While the weather in recent months has been unusually mild and supportive of construction activity, the pick up in home building has been far too persistent to be written off as just temporary," he said, adding that starts have now moved well above underlying demand.
"The trend away from building detached homes in favour of condos continues unabated, particularly in Toronto, Vancouver and Montreal. ... Interestingly, the single-unit segment is very well behaved, if not underserved, and the scarcity of such homes is one reason detached prices in Toronto are being bid up."
Dina Cover, a TD economist said the level of home starts recorded in April is not sustainable.
We expect to see some give-back in the coming months. Still, residential construction will likely be a larger contributor to real GDP growth in Q2 than we had anticipated," she said.
"Overall, we expect homebuilding activity to remain healthy this year, as builders work to complete projects before the Bank of Canada begins to hike interest rates — a move we expect to take place in September."
RBC economist Kirsten Cornelson said April's acceleration of building activity suggests the strength in starts in the first quarter may not have been entirely due to warmer than usual weather.
"While (the) report presents some upside risk to our housing starts forecast for 2012, we nonetheless expect that there will be some easing in the coming months to a more sustainable pace of growth."
The Bank of Canada and federal Finance Minister Jim Flaherty recently stepped up their warnings to Canadians to moderate borrowing on real estate, declaring household debt to be the domestic economy's number one enemy.
The finance minister has also announced changes to the designed to tighten controls on lending from CMHC, a move that was further expected to slow the market.