OTTAWA - Canada's housing starts in March declined for the first time this year, as fewer apartment and condo construction projects in urban areas drew down the national average.

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

That amounted to a modest 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).

Levels in January and February were revised upwards.

"The moderation in March housing starts was due to a decrease in the volatile multiple starts segment (apartments and condos)," said Bob Dugan, CMHC's chief economist.

"Helping to offset this was an increase in singles starts as well as more activity in rural areas."

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.

Home construction stalled during the recession as demand dwindled in the housing market, but pent up demand has begun to outstrip the supply of homes currently on the market and construction has been picking up.

Economists at the Bank of Montreal (TSX:BMO) said that during the first quarter of 2010, housing starts rose 8.2 per cent.

"A slower pace than the prior two quarterly gains of 15.2 per cent and 22.1 per cent, but suggesting that Canadian residential construction activity continues to stride forward."

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.

Starts increased in most of Ontario in March, including the Ottawa, Thunder Bay, Windsor, Kitchener-Waterloo, London, Peterborough, St. Catharines and Hamilton.

However, in the Toronto area, starts declined by 23 per cent to 26,300 units last month.

"Housing starts in Toronto are showing two separate sub-plots. High rise condominium starts have made little progress over the past several months while low rise singles and rows are making considerable headway," said Shaun Hildebrand, CMHC's senior market analyst for the Toronto area.

"As housing in Toronto becomes less affordable, demand will shift towards condominiums and construction will again begin to favour high rise projects," he added.

The BMO report said it is not surprising that starts in B.C., Alberta and Ontario continue to drive the recovery in construction activity, given that they were hardest hit during the recession, and have the hottest housing markets at the moment.

While housing starts dipped in March, Canadian residential construction activity continues to play catch-up with demand," they wrote in a report Monday.

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