Canadian housing starts fell a greater-than-expected 10.9% in January to an annualized 153,500 from 172,200 in December. Market expectations had been for a much more modest drop to an annualized 169,300. CMHC, which compiles the data, suggested that the weakness might partly reflect some weakening in sales and increased listings for existing homes, thus reducing the demand for new construction. A colder-than-normal January in southern Ontario may have weighed further on activity, although CMHC did not cite this factor.

The weakness in new construction was relatively broadly based. Urban singles plunged 20.2% in the month, while the multiples component dropped 12.2%. Some offset was provided by a 21.3% rise in rural starts estimated by CMHC.

All five major regions showed declines in the month. The largest percent decline occurred in the Prairie region (30.3%), but British Columbia was a close second (29.1%). Declines in the remaining regions included a drop in Ontario of 14.6%, an 8.6% decline in the Atlantic region and a relatively moderate 1.4% fall in Quebec.

The continuing weakness in housing starts going into 2009 is not totally unexpected. The initial weakening in new construction activity from a Q3/2007 peak of 243,000 reflected the earlier deterioration in affordability as house price gains in certain regions of the country outstripped increases in income.

However, this source of weakness is increasingly being overlaid by the macroeconomic impact of the credit tightening on employment growth that was clearly evident in last Friday's employment report showing a phenomenal 129,000 jobs lost in January. To help contain this fallout, we now expect that the Bank of Canada will lower the overnight rate again on March 3, reducing it by 50 basis points to 0.50%.

This easing in monetary policy has been matched by stimulative fiscal policy as outlined in the federal government's budget released the end of January that included both personal income tax cuts and increased government spending on infrastructure. The budget also included a commitment to increase purchases of securitized mortgages as a way to boost funding for the purchase of homes and thus contain the weakening in the Canadian housing market.