Canada's housing starts in March declined for the first time this year as the number of new apartment and condo construction projects in urban areas dropped from higher-than-expected February levels.

The overall seasonally adjusted annual rate of housing starts slipped to 197,300 units in March, down from a revised 200,400 in February, according to a report from Canada Mortgage and Housing Corp.

That amounted to a 1.5 per cent monthly decline after reported month-over-month gains of 7.5 per cent in January (189,000 units), and six per cent in February (200,400 units).

Housing starts for January and February were revised upwards as construction picked up faster than economists had predicted.

Robert Kavcic, an economist at the Bank of Montreal (TSX:BMO), said the March decline was a reflection of warmer than usual February weather, especially in Ontario, which favoured an early start on projects planned for spring.

"So it's not surprising to see the multi (units) pull back in March just from those outside levels in February...its just a shifting around because of the weather."

New home construction stalled during the recession as housing market activity weakened, but pent up demand has begun to outstrip the supply of homes currently on the market, driving up home prices and housing starts.

Rural starts were estimated at 22,100 units in March, an increase from 17,600 in February. Urban multiple-dwelling starts decreased by 15.2 per cent to 77,500 units, while single urban starts increased 6.9 per cent to 97,700 units.

The annual rate of urban starts decreased by 4.2 per cent to 175,200 units in March.

March's annual rate of urban starts increased 13.5 per cent in Quebec and 7.3 per cent in the Prairie region, but dropped 16.3 per cent in British Columbia, 15.5 per cent in Ontario, and by eight per cent in Atlantic Canada.

In the Toronto area, starts declined by 23 per cent to 26,300 units last month from 34,100 in February.

Gregory Klump, chief economist at the Canadian Real Estate Association, said not-withstanding the March decline, the figures continue an overall trend of increasing supply of new homes.

"It's really a matter of the market going from a seller's market in many major markets to a more balanced position in the second half of the year and certainly these numbers are still consistent with that."

Quebec saw starts rise in its major urban centres expect Gatineau and the Atlantic provinces saw rises in Halifax and St. John's, no change in urban centres in Prince Edward Island, and a drop in New Brunswick.

In the Vancouver area, new home starts in the first quarter of 2010, were 76 per cent higher than the same period last year. In Ontario, first quarter new home construction ran 18 per cent above the same period last year.

Kavcic was not surprised that B.C. and Ontario continued to drive the recovery, given that they were hardest hit during the recession.

Housing starts rose 8.2 per cent during the first quarter of 2010, slower than the prior two quarterly gains of 15 per cent and 22 per cent, but still suggesting that residential construction continues to play catch up with demand, Kavcic said.

Economists predict rising mortgage rates, stricter mortgage rules coming next week and the harmonized sales tax hitting the housing markets of B.C. and Ontario will put a damper on activity in the sector and take some steam out of housing starts.

Kavcic suggested demand will likely drop off in the second half of 2010 with housing starts to cool about six months later. Until then, housing starts will continue to hover around levels seen in the past few months, he said.

"The building activity we're seeing now is still in response to the strong sales activity we've seen late last year."