Source: The Canadian Press

Canada’s housing market continues to show signs of surprising resilience, with permits rising by over 20% in December on the strength of activity in and around Toronto.

Statistics Canada reported Monday the value of building permits issued during the month rose 2.4% to $5.7 billion, a modest pick-up due to a 22% dip in non-residential building intentions.

But residential permits had a big month, gaining 21% over November, with permits for buildings like condos, townhouses and apartments expanding by 55%.

On a unit rather than value basis, permits increased 27% to 215,000 annualized, which would be the biggest gain in five years.

Toronto and nearby municipalities led the resurgence, with the country’s largest city recording a 50% pop in permits, while nearby Hamilton saw a 39% boost, and the tri-cities of Kitchener-Waterloo-Cambridge issuing 154% more permits.

Analysts were quick to note the residential sector gains largely reverse declines in the previous two months, but they also pointed out that still leaves the housing sector at elevated levels.

Despite a recent cooling trend, Canada’s housing market has experienced a remarkable recovery that has taken it past pre-recession peaks on several fronts — particularly prices.

Finance Minister Jim Flaherty has moved three times over the past two years to tighten mortgage rules in an attempt to cool the market.

Still, many are predicting a reckoning down the road.

“As we’ve argued before, we believe that the Canadian housing market is at cycle tops on a number of variables, and that it will moderate through 2011,” said Scotiabank economists Derek Holt, Gorica Djeric and Sarah Howcroft in a note Monday.

The Bank of Canada has forecast that housing will be a minor net negative for the economy this year, although it also cautions the market is a potential key downside risk for the economy.

Last week, in the gloomiest of reports to date, Capital Economics analyst David Madani said house prices were just a few interest rate hikes away from a 25% correction over the next three years.

While such alarms have been raised before, the collapse has yet to materialize, and according to CIBC economist Krishen Rangasamy, is unlikely to this time as well.

Rangasamy agrees that several indicators suggests the housing market is unsustainable. In particular, prices versus incomes are well above historical averages, and home ownership is already at record highs.

But he said the fundamentals — steady if moderate economic and employment growth, and super-low interest rates — are still providing sturdy support for the market.

“We don’t see a spectacular increase in the market, but we still don’t see it collapsing like some people do either,” he said.

“Fundamentals are supportive of growth in Canada and when you have a low interest rate environment, that certainly supports the housing sector and avoids the collapse that some people are calling for.”

Interest rates are likely to start rising later this year, but only moderately.

Rangasamy believes Canada will see about 170,000 housing starts this year, about the level needed to accommodate population growth, with prices remaining relatively flat.

Fresh data Wednesday on home starts and the new home price index Thursday will help shed more light on the direction of the key sector.

December’s report completed the picture for building permits in 2010.

The value of permits issued by municipalities rose 19.8% to $73.1 billion overall. Residential construction intentions were up 27.6% to $44.3 billion, and the value of non-residential permits increased by 9.5% to $28.8 billion.