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New home construction in the Inspiration Community project by developers Tribute Communities in Richmond Hill Nov 10, 2010.Moe Doiron/The Globe and Mail

Canadian housing starts slowed in September on declines in the apartment and condo market, but the fall was not as sharp as expected, Canada Mortgage and Housing Corp data showed on Tuesday.

Analysts said the market will likely cool further.

Housing starts fell to a seasonally adjusted annualized rate of 220,215 units in September. That was down from 225,328 units in August but still well above forecasts for a drop to 207,500, according to a Reuters poll of analysts.

The August figure was revised up from 224,900 units reported previously.

"Canadian housing starts continue to run at an elevated pace, but momentum cooled somewhat in September and for all of Q3," BMO Financial Group economist Robert Kavcic wrote in a note to clients. "The gradual cooling will likely persist given the sales slowdown currently taking place in a number of major markets."

The CMHC said September's slowdown in starts was mostly due to a decrease in the urban multiples market – typically condos and apartment buildings.

"As expected, the number of multiples starts in Ontario, particularly in Toronto, reverted back to a level more in line with the average pace of activity over the last six months," said Mathieu Laberge, deputy chief economist at CMHC.

"Following a period of elevated housing starts activity due to strong volumes of multi-family unit pre-sales in 2010 and 2011, the pace of housing starts is expected to moderate," he added.

A long run-up in Canadian house prices and a condominium building boom in Toronto and Vancouver have sparked some concern of a housing bubble. The International Monetary Fund on Monday singled out Canada's housing boom as a factor to watch.

The government tightened mortgage lending rules in July to make it harder for homebuyers to take on too much debt, and the September housing-starts data is just the latest signal that the market has begun to cool despite continued low interest rates.

"In our view, Canada still has overbuilding concerns. The level of household formation does not support the level of construction activity that we are seeing each month," Francis Fong, an economist with TD Economics, said in a research note.

"However, given the lower-for-longer interest environment in which we currently find ourselves, we anticipate a slow moderation in both new sales and construction activity towards their long-term trend levels over the next few years," he said.

The rate of urban starts fell by 3 per cent to 203,731 units in September, driven by a slowdown in Ontario's hot condo sector. National single starts fell 1.4 per cent to 67,643 and multiple starts fell 3.9 per cent to 136,088 units, according to the CMHC report.

Urban starts rose in the Atlantic region, Quebec and the Prairies, but fell in Ontario and British Columbia, the two provinces that have had the most overheated housing markets in the past several years.

Scotia Capital economists Derek Holt and Dov Zigler, in a research note, said multiple housing starts have returned to their pre-crisis peaks.

"As inventories stockpile, investor demand wanes and new projects are pulled, condominium starts are poised to soften into next year and this will play the greatest role in driving cooler housing markets."