Housing starts jump, but more gloom seen

By David Ljunggren

OTTAWA (Reuters) - Housing starts rose an unexpectedly strong 13.7 percent in March, breaking a six-month losing streak, but analysts said the recovery is likely to be temporary.

Ground breaking on new homes climbed to a seasonally adjusted annualized rate of 154,700 units from an upwardly revised 136,100 units in February, Canada Mortgage and Housing Corp said on Wednesday.

Analysts had predicted 130,000 starts in March.

The housing downturn in Canada has hit starts, home prices as well as sales activity. Economists describe this as part of a "correction" in the sector, which is expected to last the better part of this year before there is a rebound in 2010.

"On the surface, this was a very strong report ... However, in the grand scheme of things, the key economic fundamental factors continue to point to further weakness in Canadian housing sector activity," said Millan Mulraine, an economics strategist at TD Securities.

"As such, we believe that this surprising pick-up in construction activity is likely to be a one-month wonder, and expect activity to soften in the coming months."

Construction of urban single-family homes rose 1.3 percent to 46,400 units last month from 45,800 in February.

Construction of multiple dwellings, such as condos, jumped by 28.3 percent to an annual rate of 81,500 units from 63,500. Analysts say this sector is particularly volatile.

"New home construction is now at a more sustainable level after having been exceptionally strong over the past seven years, exceeding 200,000 units per year," the CMHC said in a statement.

Rural starts in March were estimated at an annual rate of 26,800 units, unchanged from February.

The Canadian dollar strengthened on the data and by 9:45 a.m. EST was at C$1.2315 to the U.S. dollar, or 81.20 U.S. cents, compared to C$1.2378, or 80.78 cents, at Tuesday's close.

Doug Porter of BMO Capital Markets Economics, noting the March starts were down 35 percent from March 2008, said the latest figure was likely to be a one-off.

"The housing sector is still trying to find a bottom, and with prices in retreat in most major cities, we wouldn't look for a lasting rebound in homebuilding until at least 2010. Starts are expected to average 145,000 units this year, and this report does nothing to alter that view," he said.

The March surge was fed by increased activity in multiple units in the central provinces of Quebec and Ontario, while the once hot economy in Western Canada continued to cool.

Derek Holt and Karen Cordes of Scotia Capital said the jump was "a step backward in the push to work off increasingly bloated Canadian housing inventories in the new and existing home segments, so higher than expected construction volumes are bearish for prices going forward".

($1=$1.23 Canadian)

(Additional reporting by Ka Yan Ng in Toronto; editing by Peter Galloway)

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