Housing strarts outpace expectations

In an echo of Friday's much stronger than expected jobs report for February, Canadian housing starts also blew the roof off Bay Street forecasts last month, boosted by a big jump in condominium construction.

The numbers further differentiate the still relatively robust state of Canada's economy from the rapid deceleration of the U.S. economic engine.

However, Canada Mortgage and Housing Corp. said yesterday that it still expects the trend in housing starts to head down by the end of this year.

The seasonally adjusted annual rate of starts hit 256,900 units last month, CMHC said. It outstripped the consensus forecast of private sector economists by 51,900 units, and was also up from 222,700 units in January.

"The robust results achieved this month are mainly attributed to increased condominium starts, which reflect strong condominium sales over the past year or two," Bob Dugan, chief economist at CMHC's market analysis centre, said in a news release.

"Despite this sizable growth in February, we continue to expect that the trend in housing starts will decrease gradually between now and the end of 2008."

The biggest gains came in British Columbia, where urban starts climbed 45.2 per cent. Quebec was next, with a 26.2-per-cent increase, followed by 16.9 per cent in Atlantic Canada and 16.4 per cent in Ontario. The Prairie provinces, however, "bucked the trend" with a decline of 9.6 per cent, CMHC said.

Paul Ferley, assistant chief economist at Royal Bank of Canada, also cautioned that housing starts will likely moderate for the year as a whole.

"This projected slowing is consistent with some deterioration in housing affordability in recent quarters and the fact that most of the strength so far this year has been in the volatile multiples component," Mr. Ferley said in a note to clients. "As well, a generalized slowing in economic activity, with attendant downward impact on employment and income, will also weigh on housing going forward."

In fact, he added, the risks to the overall economic outlook are "largely on the downside in the face of a possible recession in the U.S., a high Canadian dollar and continuing tight credit conditions."

As a result, Mr. Ferley said he expects the Bank of Canada will continue to cut interest rates, taking its benchmark overnight lending rate to 3 per cent from 3.5 per cent by the middle of the year.

At Toronto-Dominion Bank, meanwhile, economist Millan Mulraine said strong construction activity in early 2008 means the housing sector is likely to boost Canada's gross domestic product modestly in the first quarter.

"In start contrast to the prolonged recession in the U.S. residential housing sector, activity in the Canadian housing market will likely remain in fairly good shape through 2008 on account of the strong labour market conditions, record wage growth and favourable mortgage rates," Mr. Mulraine said in a note to clients.

However, he said he expects activity to take a breather from the breakneck pace of the past few years.

(prepared by John Partridge/Globe and Mail)