Neither weather nor worry is putting a chill on condominium construction.
Developers began building a surprisingly high number of condo units in February, despite freezing temperatures and fears of overbuilding in cities like Toronto, Montreal and Quebec City.
A new reading Monday on the strength of the condo market, particularly in Central and Eastern Canada, raised eyebrows among economists. And it came at the same time as a new forecast suggested that Toronto, the city that ignited talk of a condo bubble, is facing declining prices this year and next.
Across the country, according to Canada Mortgage and Housing Corp., initial construction of new homes climbed in February to an annual pace of 192,094, seasonally adjusted, above the 190,000 housing starts forecast by analysts and up from 180,481 in January.
Economists say this current level is somewhat above the number of homes that are required based on demographic data about household formation. And the culprit is the condo market.
"As the spring housing market emerges and with building permits outpacing the level of housing starts for the 11th consecutive month in February, there remains some upside risk for housing activity to strengthen in the near-term," said Royal Bank of Canada economist Laura Cooper.
"That being said, we anticipate that the recent moderation in resale activity will spill over into the home-building sector as overall housing affordability pressures will increasingly weigh on housing demand."
Starts of detached homes in urban areas, townhomes and semi-detached houses were all down, noted Bank of Montreal economist Benjamin Reitzes. Starts of homes in rural areas were also down. Quebec saw the biggest leap in housing starts, while Atlantic Canada also registered strong gains, though Ontario was flat.
Construction of multiple units in cities rose this past month by more than 13 per cent to almost 116,500, CMHC said, while starts fell by 2.4 per cent in the single-detached category.
The numbers were even more surprising to economists who had expected that February's weather could lead to a weaker-than-expected showing.
"After weather-related weakness sent a chill through Canada's home-building sector in recent months, activity began to heat up in February with the six-month trend rate of starts increasing for the first time since October, 2013," Ms. Cooper said in a research note.
The higher level of condo starts comes amid fears of a high level of condo completions in Toronto, Canada's most populous city.
All of the units in a condo building are included in the housing starts data at the time when construction on that building begins. But those condos will take years to be completed.
In the meantime, Toronto-Dominion Bank economists said in a report that they expect 70,000 new condo units to be completed in the Greater Toronto Area over 2014 and 2015, which they anticipate will push condo prices down by about 4 per cent a year over that time.
"Toronto's skyline of cranes is now about to transform into a skyline of condo buildings," the report said.
"In addition to the burgeoning supply of new units, the eroding economics of investing in rental properties are likely to put a significant damper on the region's condo market," it added, saying that the cost of carrying an average-priced condo has been exceeding the rent that can be earned on it.
Urbanation Inc., which tracks data on new condos in Toronto, said it expects that the construction of some of the condo buildings that TD anticipates will be completed this year and next will be delayed.
In any case, the TD report's predictions are much rosier than the significant downturn or market crash that some of the more bearish observers have been expecting, and it noted that the sharp increase in condo construction in the GTA comes amid a decrease in construction of detached houses.
"We expect home sales and price growth to cool gradually over the next few years," the report said. "The condo market is likely to bear the brunt of the housing slowdown, but there will be knock-on effects to other segments of the market."
A top Bank of Canada official noted this past week that the central bank is expecting household debt, house prices and housing starts to level off and then gradually decline, enabling the market to ease into a so-called soft landing.
This past week the Bank of Canada Deputy Governor John Murray noted in a speech that "household debt and housing sector activity are not only exceedingly elevated relative to past experience in Canada, they have also approached levels where real estate busts were observed in other countries."
But he added that the central bank's base-case projection still sees "household debt, housing prices and housing starts levelling off and then gradually declining," achieving a so-called soft landing. "Recent data, such as decelerating monthly price increases for existing homes, a declining number of housing starts and historically low rates of household credit growth, all support this view and indicate that the situation is stabilizing, although the risks remain elevated," he said in the speech Thursday.
Economists said on Monday that they continue to expect that housing starts will decline, despite February's strong showing.
"As the spring housing market emerges and with building permits outpacing the level of housing starts for the 11th consecutive month in February, there remains some upside risk for housing activity to strengthen in the near-term," RBC's Ms. Cooper wrote. "That being said, we anticipate that the recent moderation in resale activity will spill over into the homebuilding sector as overall housing affordability pressures will increasingly weigh on housing demand."