CORRECTED - UPDATE 3-Canada housing starts show surprising strength

Tue Nov 8, 2011 1:37pm EST

* Starts drop in October from the month before

* October's 208,800 starts up from 195,000 forecast

* Market supported by growth in condominiums

By Claire Sibonney

TORONTO, Nov 8 (Reuters) - Housing starts in Canada were higher than forecast in October, supported by low interest rates, but analysts see a slowdown coming as the global economic outlook darkens.

Canada Mortgage and Housing Corp (CMHC) said on Tuesday there were 207,600 starts in October on a seasonally adjusted annualized basis. That was up from 195,000 forecast by analysts in a Reuters poll ECONCA>, but still down from an upwardly revised 208,800 units in September.

CMHC said that condominium construction continued to pace the market, overshadowing starts on single-detached homes.

Mazen Issa, Canada macro strategist at TD Securities, said in a note to clients that low interest rates - and the likelihood that the Bank of Canada will keep them low in the face of a bleaker economic climate - may continue to support the housing market.

But he cautioned that tighter mortgage rules, diminished household spending capacity, and higher five-year mortgage rates will weigh.

In September there was a third consecutive monthly decline in building permits issued, and other reports have suggested markedly weaker economic growth toward the end of the year, signaled by data showing an unexpected jobs loss and a slower pace of purchasing activity in October.

Issa said, however, that the housing market in Canada may continue to look healthy compared with others.

"Broadly speaking, the Canadian economy remains favorably situated relative to its global peers as headwinds on the international front have intensified," he said.

Those headwinds - such as Europe's escalating debt crisis, sluggish global growth and market volatility - have further pushed back expectations on the timing of the next increase in the Bank of Canada's benchmark interest rate, currently at 1 percent.

Urban multiple housing starts, mainly condominiums, remained strong in October, while weakness in single starts was responsible for the slight decline in the overall number.

Ontario led the other provinces due to strength in condominium construction. "Yep, it was all condos," Robert Kavcic, economist at BMO Capital Markets said in a note to clients.

"On the supply side, there's a clear divide between singles and condos, with the latter looking more vulnerable if a correction does indeed come."

He noted that overall multi-unit starts, climbing for the past year, jumped 1.7 percent to 123,600, the highest level since October 2008. Single starts plunged 9 percent to the lowest level in just over two years.

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