Garry Marr, Financial Post 

The Canadian housing market’s surprising turnaround is spreading to new home construction as developers scramble to respond to a supply shortage that has sent pricing soaring for existing homes.

But any increase in construction on the new home side will likely not surface fast enough to feed the demand for housing that continues to be spurred on by record low interest rates.

Canada Mortgage and Housing Corp. said Monday there were 157,300 units constructed last month on a seasonally adjusted annualized basis, a 5.4% increase from a month earlier. Annualized starts at dropped as low as 118,500 in April.

“There is not a lot of inventory around,” said Gary Friend, president of the Canadian Home Builders’ Association, adding his industry has been careful not to speculate. “We have to watch our Ps and Qs, as we try to meet this demand.”

Any increase in supply would be welcomed as a shortage of new listings has lead to a spike in prices. The Canadian Real Estate Association said last month existing home prices across the country were up 13.6% in September from a year ago as a supply problem was evident in almost every city.

The shortage has yet to ease despite the suggestion higher prices would coax homeowners to sell. This month the Toronto Real Estate Board reported sale prices in October were up 20% from a year ago.

“The existing homes market is in short supply so we’ve gone from a buyer’s market to seller’s market. The way it gets linked is you get some spillover into the new homes market and that’s starting to happen,” said Bob Dugan, chief economist with CMHC.

The agency has already upped its forecast for new home construction for 2010 from 150,300 to 164,900. Even at that level though, construction is still well off the 211,000 new starts recorded in 2008.

Paul Ferley, assistant chief economist with the Royal Bank of Canada, said “at the margins” new home construction could help ease the housing crunch. “Builders are aware and will contribute where they can to advance construction activity but no they can’t turn on a dime.”