TORONTO - Canadian housing starts rose by a larger than expected 5.8 percent in January, the fourth straight monthly gain, offering further proof of housing's strength in an otherwise tepid economy.

Housing starts rose to a seasonally adjusted rate of 186,300 units from an upwardly revised 176,100 units in December, Canada Mortgage and Housing Corp said on Monday.

The number of starts was above the consensus expectation of analysts for 180,000 units. The December figure was revised up from 174,500 units.

The pace of new home construction remains the strongest since October 2008, and economists warned that the boost in building could push prices lower, especially since mortgage rates are poised to rise later in the year.

Supply is rapidly coming back into Canada's housing market compared to the extreme shortfalls of last spring through summer, and that should have one increasingly concerned about house prices later this year, Scotia Capital economists said in a research note.

More supply, compared to the extreme tightness over last summer and into the fall, combined with higher future variable and fixed (mortgage) rates will combine to cool housing demand and pose downside risks to house prices over the second half of 2010 and into 2011, they added.

CMHC said housing starts improved in both the single-family and multiple-family segments in January, with increases similar to the ones that occurred in December.

Urban starts rose 4.4 percent to 165,200 units in January. Groundbreaking on multiple family dwellings was up 5.7 percent to 76,300, while single starts were 3.3 percent higher at a 88,900 annual rate.

The active start to 2010 sets the stage for another positive contribution to first quarter economic growth.

If the January pace sets the tone for the whole quarter, then housing starts will be up another 12 percent quarter-over-quarter, non-annualized, Scotia Capital said.

But TD Securities economist Millan Mulraine said the report may be exaggerating the strength in housing, with a big uptick in some regional numbers linked to home building related to the February Olympic Games in Vancouver, British Columbia.

SALES FORECAST TO RISE

January's seasonally adjusted annual rate of urban starts increased by 19.8 percent in British Columbia, 7.3 percent in Quebec, 2.3 percent in Atlantic Canada, and 1.5 percent in the Ontario. In the Prairie region, the seasonally adjusted annual rate of urban starts fell 4.8 percent.

Overall, with the fourth monthly gain in residential construction activity in Canada, it appears that the new homes market is slowly coming back to life and may finally be benefiting from the resurgence in overall Canadian housing market activity, Mulraine said in a research note.

However, with part of the uptick in starts likely to be coming as a result of temporary factors, namely the surge in Olympic-related housing in B.C., we believe that this report overstates the true strength of the recovery in residential construction and expected to see a modest pull-back next month.

A separate report by the Canadian Real Estate Association showed a brighter outlook for home sales in 2010.

With Canadian economic growth rebounding from the recession, the unusually severe decline in sales activity in early 2009 is not expected to recur in 2010. Annual activity in 2010 is forecast to be well above the previous year's level as a result, CREA said in its forecast.

The group said it expects record sales 527,300 units nationally in 2010, up 13.3 percent from 2009. Low interest rates early in 2010 will fuel demand through the first half of the year, before activity trends downward later in the year.

Home sales activity was forecast to decline 7.1 percent to 490,100 units in 2011, CREA said.

Although interest rates are expected to rise, they will still be low enough to keep affordability within reach for many homebuyers requiring mortgage financing, and support overall housing demand, CREA President Dale Ripplinger said in a statement.

The national average home price was forecast to climb 5.4 percent in 2010, reaching a record C$337,500 ($315,420), before easing 1.5 percent in 2011.

($1=$1.07 Canadian) (Reporting by Andrea Hopkins, Editing by Peter Galloway)

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