The number of homes built in July fell compared to the month before, but economists are calling it a "temporary bump on the road to recovery" as sales and building permits continue to rise from recent recessionary lows.

Housing starts fell to a seasonally adjusted rate of 132,100 units in July, down from 137,800 units in June, the Canada Mortgage and Housing Corp. (CMHC) said Tuesday.

The agency estimated there were 12,712 actual starts last month, down from 18,229 actual starts in July 2008.

Economists say the "volatile" condominium market is behind the July drop, along with extreme weather in places such as Ontario.

Urban starts fell 5.5 per cent in July to a seasonally adjusted 113,500 units compared to June, with multiple starts down nine per cent and singles off 1.1 per cent.

Every region except Quebec saw housing starts drop in July. Starts in Quebec rose 16.6 per cent, but fell 17 per cent in the Prairies, 15 per cent in Ontario, 10 per cent in British Columbia, and 1.4 per cent in Atlantic Canada.

"Although July registered a decline, housing starts are expected to improve throughout 2009," said Bob Dugan, CMHC's chief economist.

CMHC is forecasting 160,250 starts this year, rising to about 163,350 for 2010.

It said demand, based on current demographics, is estimated at about 175,000 units per year and that starts will "gradually become more closely aligned" to that figure over the next few years.

BMO Capital Markets economist Robert Kavcic said the July housing starts figures are "comfortably above" the seasonally adjusted low reached in April of 118,500.

"The setback in Canadian residential construction activity in July is likely a temporary bump on the road to recovery, especially when taken in combination with surging permits and home sales," Kavcic said.

"It's still safe to say that Canada's housing market is on the mend."

However, Kavcic noted the current trend is still "a far cry" from pre-recession levels that, for about six years, were in the annual range of 225,000 starts.

TD Bank economist Pascal Gauthier expects the weaker starts to continue this year around the 150,000 units level and only "a modest bounce" in 2010.

"After entering this downturn following an unprecedented housing boom, both in terms of length and depth, and faced with a higher inventory of unsold units coming out the recession, it remains highly unlikely that housing starts could revisit pre-recession levels for years to come," Gauthier said.

"A gradual return towards the pre-boom, 2001 levels near 160,000 units by 2011 is a safer bet."

Housing starts this year are down sharply from 2008 and 2007, when builders and buyers responded to a strong economy, low interest rates and years of pent-up demand. CMHC said in January that starts reached 211,056 units in 2008, down from 228,343 in 2007.

Scotiabank economist Adrienne Warren anticipates a "gradual recovery" in the housing market in the months ahead.

She said the drop in July's housing starts proves the market is still volatile, although she doesn't anticipate another huge housing correction in the Canadian market.

Warren said the trend is still towards growth in building permits, starts and resale activity, which she believes is due largely to the current historically low interest rate environment.

"Affordability is driving it," she said.

Last week, Statistics Canada says the value of residential building permits increased for the fourth consecutive month, rising 0.5 per cent to $2.7 billion in June.

Warren said home builders are responding to what is happening in the resale housing market, which is showing cross-country gains after a market slowdown as a result of the recession.

The Canadian Real Estate Association is expected to release resale housing data for July later this week, but some big cities have already reported higher sales.

In Toronto, sales of existing homes rose 28 per cent in July to 9,967 from the same time last year and the average price of a home was up six per cent to $395,414.

In Vancouver, Canada's most expensive housing market, home sales were up 89.2 per cent compared to the same month last year.

In fact, the Vancouver area also set a monthly record for the number of residential properties sold in July, at 4,144. That beat the sales record of 4,023 homes sold in July 2003.

Vancouver area prices are down five per cent to $528,821 in July compared to last year, but up about nine per cent from the start of the year, local real estate figures show.

In Calgary, sales rose in July to 1,585, a 21 per cent increase from July 2008. Prices for the average single family home were $436,782 last month, down about four per cent from the same month last year.

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