Aug. 15 (Bloomberg) -- Canada's federal housing agency said home starts will decline this year and next because of higher housing costs and mortgage rates, while sales of existing homes and spending on renovation will keep rising.

Construction of new homes will decline to 220,000 units this year from 227,395 in 2006, and then to 207,200 units in 2008, the Ottawa-based Canada Mortgage and Housing Corporation said today. Starts will decline in every province except Quebec, Manitoba and Saskatchewan.

``The slight pull back in housing starts this year and next will be mainly due to the continued growth in house prices coupled with modest increases in mortgage rates,'' CMHC chief economist Bob Dugan said in the statement.

CMHC's forecast meshes with that of the Bank of Canada, which expects the housing sector to add 0.1 percentage point to growth this year, before cutting growth by the same amount next year. The central bank also said in July that it expects home prices to make a smaller contribution to inflation, easing pressure to raise interest rates to keep housing costs down.

Along with prices, mortgage costs rose this year and the country's central bank raised its benchmark interest rate to 4.5 percent in July. The average five-year fixed mortgage rate climbed to 7.24 percent in the second week of August, up from 6.45 percent at the start of the year, Bloomberg figures show.

CMHC's forecast is similar to one released today by the Canadian Home Builders' Association. The trade group predicted there will be 219,500 new homes this year, and 215,400 in 2008.

Renovation Spending

Even as construction of new homes declines, the two groups predicted renovation spending will continue to rise. Canadian homeowners will spend C$49.9 billion on home improvements this year, a 9.8 percent increase from 2006, and C$53.3 billion in 2008, CHMC said.

Canadian existing-home sales will increase to a record 514,450 units this year, a 6.5 percent gain from 2006, before dropping to 494,750 in 2008, CMHC also said.

Sales of existing homes rose to a fourth straight monthly record in July, Canada's realtor association said today. The lowest unemployment in three decades led consumers to shrug off reports of trouble in the U.S. subprime mortgage market, the group said.

Home sales listed on the Canadian Real Estate Association's Multiple Listing Service rose 0.8 percent to a seasonally adjusted 31,667 units, the Ottawa-based group said.

Canadian new-home starts fell more than expected to their lowest in four months in July, as demand for multiple-family projects such as apartments and condos eased.

Housing starts fell to 215,600 units on an annual basis from 225,300 in June, CMHC said Aug. 9. Economists surveyed by Bloomberg News estimated work would start on 223,500 units, the median of 21 responses.

Prices for new homes advanced 0.7 percent during June, and were up 7.8 percent from a year ago, the statistics agency said Aug. 9. Economists surveyed by Bloomberg News had predicted a 0.8 percent increase, according to the median estimate.

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.

Last Updated: August 15, 2007 11:38 EDT