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New housing construction in Calgary, Alta., Thursday, June 26, 2014

Jeff McIntosh/The Globe and Mail

Canada's housing market is showing more strength than anticipated, with low interest rates contributing to construction and sales levels that are defying expectations.About 198,185 units got under way last month on a seasonally adjusted annualized basis, while the consensus forecast from economists was around 190,000 housing starts.

"Low interest rates are adding more fuel to the housing market's tank," Toronto-Dominion Bank economic analyst Admir Kolaj wrote in a research note. "Builders are clearly responding to the low interest rate environment and continued strong price growth in the existing home market by keeping construction activity elevated."

Economists continue to project an eventual soft slowdown in the market, with a number of them saying that we have been building too many homes of late.

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"Many of Canada's biggest cities are already flush with condos for sale and still have a record number of units under construction, many of which will end up on the market once completed," Mr. Kolaj wrote. "Over the medium term, we believe that overbuilding, along with gradually rising interest rates, will lead to a cooling in home price growth."

But, for now, record-low mortgage rates could continue to spur the market.

"The resiliency of the Canadian housing market has surprised expectations for a transition to lower, more sustainable levels and the latest monthly reading is no exception," Royal Bank of Canada economist Laura Cooper wrote in a research note. "Moreover, the recent outperformance of building permits and the persistence of lean mortgage rates provides upside risk for new housing demand to remain elevated in the near term."

The increasing popularity of condos, and pace of condo construction, has been one of the factors causing the actual number of housing starts to diverge from economists' estimates.

"Both single and multi-unit starts edged up slightly in June, but the bigger picture remains one of much higher levels of condo building in Canada's urban markets, by nearly a 2-to-1 margin," Bank of Montreal economist Robert Kavcic wrote in a research note.

Much of June's strength can be attributed to the especially strong market in Alberta, which is less worrisome, because "they need the houses," he added. "Housing starts in the province saw a massive burst to 53,700 annualized units, a level topped only in a handful of months during the pre-recession housing boom in 2006/07."

"Meanwhile, activity cooled across much of the rest of the country in the month, including noteworthy declines in Quebec and Ontario."

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The strong numbers come after the housing market had a particularly weak winter, due to unusually cold weather. Housing starts hit an annualized low of 157,000 in March, Bank of Nova Scotia economist Derek Holt noted.

"The strong numbers that we're seeing for Q2 are much more important than the weak numbers that we saw for Q1 and represent much more actual building," Mr. Holt said in a research note, pointing out that there is traditionally less new construction in winter months than at this time of year.

He added that looking through the volatility in some of the provincial numbers, the main theme is that housing construction levels have rebounded from a weak winter. That could give Canada's gross domestic product a lift for the second quarter.

It's not only construction that has rebounded. Full statistics on national sales and prices of existing homes for June will be released next week by the Canadian Real Estate Association. But preliminary data that is being released by local real estate boards across the country generally paints a picture of strength, especially in the highly populated markets of Toronto and Vancouver. May's sales topped the 10-year average for the month.

The comeback has been strong enough that TD's economics department upgraded its expectations last week for home sales and prices this year – although it continues to predict that "the Canadian housing market will cool over the medium term." On Wednesday, real estate firm Royal LePage boosted its forecast for average price growth this year.

Economists still expect the housing market's growth to peter out.

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"We remain of the view that recent robust levels of housing starts are unlikely to be maintained over the second half of the year and into 2015," Ms. Cooper wrote. She's expecting new home construction to slow to 182,000 units for 2014 as a whole, down from 188,000 units last year.

"Looking ahead to 2015, we expect house prices to track more closely to the rate of general economic growth," said Royal LePage CEO Phil Soper. "That is, we see price increases in Canada's largest cities moderating, just as our smaller city markets should see a lift."

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