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The Minto LongBranch town home development in Toronto.Fred Lum/The Globe and Mail

Canada's housing starts rose to a five-month high in August, as home construction remained brisk despite rising interest rates and the new regulations aimed at cooling the housing market.

Canada Mortgage and Housing Corp. reported that national starts of new-home construction hit a seasonally adjusted annual rate of 223,232 units last month, up slightly from July's 221,974. Economists had expected the starts to ease slightly in August, to about 215,000 annualized, after the strong July result, which itself was well above historical norms.

The starts of urban multiple-unit dwellings rose 2.7 per cent month over month, to 145,618 units annualized. Starts of urban single-family homes eased 3.2 per cent, to 61,906 units.

The continued strength suggests that builders have been little discouraged by the policies put in place by the Ontario government in April to rein in runaway housing markets in Toronto and surrounding regions, and by the Bank of Canada's interest rate increase in July, which was followed by another in early September. While house resale prices and sales in the Toronto area have cooled, and starts of new homes did initially sag immediately after the Ontario government announced its new rules, builders have bulled ahead with new projects throughout the summer.

Indeed, Ontario led the building charge in August, with more than 92,000 starts annualized, up more than 20 per cent from July and nearly 80 per cent from the slump in May in the immediate wake of the government's announcement. Starts in the Toronto market were at their highest in 17 months in August – despite evidence that the city's housing market had moderated significantly since the government's new rules took effect.

"This was a good report that suggests that the Canadian housing market remains quite strong after the wobble it suffered in the second quarter, and the uncertainty of regulatory changes in Ontario and rising interest rates," Toronto-Dominion Bank senior economist Michael Dolega said in a research note.

"The strong labour market and still-low interest rates (notwithstanding the Bank of Canada's recent hikes) are pushing up demand for the time being, and developers are responding accordingly," National Bank of Canada economist Kyle Dahms said in a research report.

Still, economists wonder how much longer those developers can keep up the pace. CMHC's so-called "trend" of housing starts, representing a six-month moving average, is now nearly 220,000, its highest in five years. The country needs only about 190,000 starts a year to keep pace with demand from new-household formation.

"The level of starts seen in the last two months are above demographic needs … and is hence not sustainable," Mr. Dahms said.

He suggested, in particular, that builders in Toronto may be overdoing it.

"Starts in Toronto appear to be unsustainable, in light of conditions in the home resale market showing an increasing inventory," Mr. Dahms said. "This situation should be monitored in the coming months to evaluate the risk of overbuilding."

Royal Bank of Canada economist Josh Nye noted that housing starts typically follow the trend on home resales, but with a lag. As a result, he believes some easing of in housing starts "is in order toward the end of the year," catching up with the slowdown in the Toronto-area resale market.

But others suggested that the flow of people to Ontario in general, and Toronto in particular – owing both to rising immigration and migration from other provinces – is sustaining demand and justifying the continued strong levels of home construction.

"Notably, while Ontario housing starts are on pace for the best year in 14 years, population growth is running at the fastest rate since that time as well," said Robert Kavcic, senior economist at Bank of Montreal.

Regardless, the strength in housing starts over the summer is good news for the country's third-quarter gross domestic product, as residential construction looks poised to make a strong contribution to the economy's quarterly growth.

"Thanks to solid gains in July and August, housing starts are on track to expand more than 30 per cent annualized in the third quarter. So, after subtracting from real GDP growth last quarter, residential construction is set to contribute to it in [the third quarter]," Mr. Dahms said.

As NAFTA is being renegotiated, the director of operations at a Canadian thermoplastics plant in Mexico considers what the trade deal could mean for the manufacturing business. Take a tour of the Exo-s factory in San Juan Del Rio.

The Canadian Press