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New home construction in Richmond Hill, Ontario. (Moe Doiron/Moe Doiron/The Globe and Mail)
New home construction in Richmond Hill, Ontario. (Moe Doiron/Moe Doiron/The Globe and Mail)

March housing starts beat estimates Add to ...

Canadian housing starts grew faster than expected in March, led by a surge in construction of multiple units that fueled concern about possible over-building in the Toronto condo market.

Canada Mortgage and Housing Corporation (CMHC) said on Wednesday that housing starts rose to 215,600 units on a seasonally adjusted annualized basis in March, up from 205,300 units in February.

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Analysts in a Reuters poll had expected 200,000 starts in a housing sector that never suffered the downturns seen in the United States and other places. The overall housing market remains robust, with bidding wars for single family homes in centers like Toronto and Vancouver.

Policy makers and economists are watching for signs the property market is softening, given that some markets appear overvalued.

The high housing prices, combined with extremely low interest rates, have tempted Canadians to take on record levels of debt, and experts say an estimated 10 per cent of borrowers could be in trouble if rates climbed to more normal levels.

“Although we expect starts to soften in due course, the latest figures suggests that, for time being, the housing sector still has a considerable amount of energy, aided by low financing costs,” said Peter Buchanan, analyst with CIBC World Markets.

Urban starts rose 4.2 per cent to 192,100 units in March, driven largely by an 8.3 per cent jump in multiple urban starts, while single starts were up a more modest 2.4 per cent, the federal housing agency said.

In Ontario, where heavy investment in condominiums has been a special point of concern, multiple urban starts in shot up by a stunning 50.4 per cent - a pace CMHC said was “exceptional, and not expected to be sustained.”

Unusually mild weather in March probably played into that rise.

“Canada’s condo craze kicked into even higher gear during March and this is bound to feed concerns about over-building,” Scotia Capital economists Derek Holt and Dov Zigler wrote in a research note on Wednesday.

The number of condominiums left unsold has been rising sharply, in contrast to the shrinking stock of unsold single-family homes, they said in a report that also noted a “shadow inventory” of unoccupied condos which were neither for sale nor on the rental market.

“The fact that multiples played a dominant role in driving starts higher will restrain the impact this has on March GDP since condos offer lower value-added during construction than single units that fell,” the report added

Finance Minister Jim Flaherty has so far resisted calls by lenders and some economists to tighten mortgage rules for a fourth time since 2008. He says he sees signs banks are regulating borrowing by themselves, and that the housing market is starting to correct itself.

However, in his federal budget in March, Mr. Flaherty did propose enhanced supervision of CMHC, which issues mortgage insurance for riskier borrowers, to ensure financial stability.

Mr. Flaherty said in New York on Tuesday that his department and the banking regulator were studying additional reporting requirements for CMHC, particularly with regards to securitization. Currently CMHC reports to Parliament through the minister of human resources and skills development.

Sounding a little less upbeat about debt levels, Bank of Canada Governor Mark Carney says monetary policy is a tool that could be used, as a last resort, to curb housing-related consumer debt.

Mr. Carney has called the excessive household debt the single biggest domestic risk to the Canadian economy. The debt to disposable income ratio hit an all-time high of 151.9 per cent last year.

Although there are parallels to the situation in the U.S. before the housing crash, the lack of a large sub-prime market and the existence of government-backed mortgage insurance are important differences that have helped ensure stability.

In the absence of action from the federal government, some analysts suspect Canada may hike interest rates as early as this year, although most forecasts are for hikes only in 2013.

“Absent additional macroprudential measures to slow the increase in household leverage, the bank will reluctantly be forced to respond,” said David Tulk, chief macro strategist at TD Securities.

The bank is expected to hold its key rate steady at a below-inflation 1 percent on April 17, its next rate announcement. But its quarterly economic report the following day could reveal just how worried, or not, the bank is about household debt.

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