OTTAWA - Canada's home-building industry was unexpectedly hot in March — particularly the condo sector in Toronto.
The latest data on residential construction surprised analysts Wednesday, with Canada Mortgage and Housing Corp. reporting 14,517 actual starts in March, giving a seasonally adjusted rate of 215,600 units a year.
That constitutes a five per cent jump from the previous month and the highest level of starts since the fall of 2008.
As well, CMHC upgraded its estimates for January and February, suggesting home construction was a key component of economic growth for Canada in the first quarter of this year.
Ontario, particularly Toronto, had the country's biggest increase in multiple-dwelling units, a group that includes condos and apartments. Multiple starts in the province jumped by 50 per cent on a seasonally adjusted basis.
"Certainly we think the housing sector will downshift at some point ... but we're not quite at that point yet," said Peter Buchanan, an analyst with CIBC World Markets.
"Clearly low mortgage-financing costs are helping to support the segment. This kind of level of starts is certainly above the underlying level of household formation by 20,000 or 30,000 (annually)."
Buchanan said the condo market may be sizzling due to demographics as baby boomers downsize from larger, detached homes, as well as international speculation and a trend to more downtown living among Canadians as the cost of commuting increases with rising gas prices.
CMHC said the condo trend is not sustainable, and many analysts agreed.
There is anecdotal evidence of a "shadow condo inventory" in Vancouver and Toronto, units that have been sold but are unoccupied and not for rent, said Scotiabank economist Derek Holt.
These unoccupied units could signal foreign investors who see Canada as one of the few global real estate plays that offer good returns, Holt said.
But it's always tricky to predict when or if a bubble will burst, he warned.
Holt noted that as far back as 2008, some were calling for Canada's housing market to plunge due to the same pressures that caused the U.S. market to collapse. However, Canadian real estate hasn't followed the same path.
"We know there are stressers in the Canadian marketplace just as there were in the U.S. It's just that you can never time the point at which they turn abruptly in the other direction," he said. "There would need (to be) a shock."
Speaking in New York on Tuesday, Finance Minister Jim Flaherty repeated his view that the housing market is slowing, adding he has no plans to tighten mortgage rules for a fourth time in six years.
"I would prefer for the market itself to correct to the extent that a correction is necessary," Flaherty said.
Flaherty did repeat his budget pledge to make changes to CMHC's rules for insuring mortgage loans, saying both his Finance officials and the Office of the Superintendent of Financial Institutions were engaged in the process.
Moody's rating service said Wednesday it foresees a soft landing for Canadian housing — not a crash — with prices rising a modest 1.1 per cent this year on average.
"But downside risks are present," it added. "Should growth in the U.S. slow, we believe Canadian house prices would fall (slightly). Should the U.S. fall into an outright recession, Canadian house prices would fall 5.6 per cent in 2012 and 10.3 per cent in 2013."
March's report did contain some evidence of retrenchment.
Starts in urban areas decreased by 27.7 per cent in British Columbia — a signal that the country's most expensive housing market, Vancouver, may be coming back to earth — and by 16.3 per cent in Quebec.
Vancouver has been cooling for months, said economist Robert Kavcic of BMO Capital Markets, so March's decline in starts was not surprising. He said starts in Vancouver have been averaging about 25,000 annualized — with allowances to fluctuations — which he described as a "balanced pace."
The Prairie provinces saw a 6.4 per cent increase in starts, with economically strong Alberta the leader in the region, while residential building rose by 2.7 per cent in Atlantic Canada.
Starts for single, detached homes slipped 2.4 per cent nationally.
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