• Canadian housing starts slip by 10.9% from December to 153,500 units in January.
  • While a 12.2% decline in multiple-unit starts is not surprising, the 20.2% drop in single-unit starts adds further downside risk to economic growth forecasts for 2009.

Only 153,000 Canadian housing starts were recorded in January, a number which came in significantly below the market expectation for 165,000 units and our own more pessimistic call for 160,000 units. What stands out in this report is the broad-based nature of the decline in activity in January. On a provincial basis, only Québec (+3.0%) and New Brunswick (+26.7%) recorded an increase in starts. Double-digit percentage drops swept through all provinces west of Québec. Further, while both the multiple (-12.2%) and single (-20.2%) unit segments of residential construction recorded significant declines in activity, it is the latter that should raise some eyebrows, for a couple of reasons.

First, this represents the largest per cent monthly drop since March 1995, and bodes poorly for the private residential investment component of real GDP growth at the onset of this year. Second, while the multiple units segment of the market is prone to large bouts of volatility, this is not typically the case for single units. The pace of construction of new single-detached homes is generally more indicative of the underlying overall trend in residential construction, which is looking increasingly dour.

The pre-2002/07 boom level of around 150,000 units is on par with where we think total housing starts could end up on average for 2009-10, with a trough around 140,000 units towards the end of this year. However, if starts continue on this downward momentum without signs of stabilization in the months that followed January, even this prudent forecast could fall by the wayside. While this is not our base case expectation going forward - and one should be careful in straight lining the current trend too far into the future - a scenario where starts average only as much as 100,000-120,000 units by the second quarter cannot be ruled out in the near-term. Given the improved home affordability backdrop, including a low interest rate environment, and, at the margin, the recently added first-time buyer fiscal incentives, it remains more likely in our view that a stabilization around 150,000 units will occur, notwithstanding month-to-month volatility around that figure. By itself, the fact that multiple units represent the majority of urban starts since 2005 and around 60% since March 2008 also adds to the overall volatility of the series, something to bear in mind when interpreting the data. Nonetheless, along with the atrocious employment report for January, this morning's report adds further downside risks to economic projections for the year, not the least of which that from the Bank of Canada (BoC). In this context highlighted by an already weak existing home market and a rapidly weakening new home market, we expect the BoC to pull the trigger once more on its policy rate and drop it to 0.5% at its decision meeting on March 3rd.