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A townhouse complex is under construction in Toronto on Thursday, November 3, 2016.Nathan Denette/The Canadian Press

Builders are launching construction on fewer detached homes in the Toronto region as buyers are favouring lower-cost housing options in a weakening market.

Toronto saw a 19-per-cent drop in detached home starts in July compared with the same month last year, while construction of other types of housing – including semi-detached homes, townhouses and condos – climbed 21 per cent in the same period, according to housing starts data released Wednesday by Canada Mortgage and Housing Corp.

Real estate experts say the soaring cost of detached houses in the region is a key factor in the construction shift, as is a longer-term push by municipalities to encourage denser housing developments.

Across Ontario as a whole, detached home starts fell 3 per cent in July from a year earlier, while other types of housing starts climbed 7 per cent. Nationally, housing starts climbed 14 per cent in July compared with a year earlier, with detached house starts growing 9 per cent, due in part to particularly strong growth in Alberta.

The numbers suggest builders in the Toronto region are still proceeding on many housing projects despite a significant downturn since April in the resale market for existing homes in Toronto and surrounding cities. Sales of existing homes fell 40 per cent in the Greater Toronto Area in July compared with a year earlier and average prices for resale homes are down 19 per cent since their peak in April.

But experts say it is typical to see a lag in the new-construction market because most housing projects that are now launching construction were presold months ago, well before the resale downturn began.

Many economists are now predicting housing starts will drop later this year or in 2018 as builders respond to waning sales demand.

Economist Diana Petramala of Toronto-Dominion Bank forecasts the pace of construction activity will soften in the second half of 2017, especially given that interest rates have started to rise.

"Given the lag between a new home sale and groundbreaking, it would appear that the strength in housing starts over the first six months of 2017 is largely due to past strength in housing demand," she wrote in a report Wednesday.

However, economist Derek Holt of Bank of Nova Scotia believes the resale market is overshooting as nervous buyers stay on the sidelines in the wake of regulatory changes, such as the new foreign buyer's tax in Ontario. He believes the sales downturn will be "fairly transitory," similar to the experience last year in Vancouver.

As a result, he argues that trends in the new-construction market are sounder, and the recent housing starts numbers are justifiably stronger. Even detached-house construction is "fairly resilient" on a longer-term basis despite a dip in July, he said.

Mr. Holt said the new-building segment is holding up better than the resale segment because pricing changes in recent years have made new homes comparatively cheaper. Resale home prices have tripled in Canada since 2000, based on the Teranet National Bank House Price Index, while prices of newly built homes have increased at half that pace, he said.

"There are pros and cons to buying both types of houses, resales and new, and I've done both over my life, but at some point the benefits have become skewed towards what's the relatively more affordable option," Mr. Holt said. "It's becoming clearer to individuals that the new builds are relatively more attractive."

Mississauga real estate agent Carlo Racioppo said he is seeing strong buyer demand for new detached houses, and he does not believe there will be a significant dip in new construction.

He credits much of the recent decline to a lack of land inventory for builders, who have pushed hard to launch construction projects in the past year as the market was soaring, so have less left to launch now. Provincial land-use policies are also encouraging denser developments, favouring townhouses and semi-attached homes over detached homes, he said.

"I don't think the starts are down because there's a lack of buyers – maybe only because of price point," said Mr. Racioppo of Royal LePage Realty Plus in Mississauga. "But if those price points came down a little bit, you'd see a rush again. I see the demand as real, and I see it as significant."

Royal LePage CEO Phil Soper says there may be a cumulative effect to policy changes meant to cool housing markets. This video is a clip from a Facebook Live discussion between Soper and Globe and Mail real estate reporter Janet McFarland

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