Canadian Housing Starts Fall, but Stay above the 200,000 Unit Mark

Housing starts fell 12% to an annualized 213,900 units from 243,000 in March. Market expectations had been for starts to drop by a more moderate 7.4% to an annualized 225,000 units. Despite the decline, however, the level of activity remains well above the 200,000 mark, which CMHC characterized as still indicative of robust housing activity.

The weakness in April was led by the urban multiples component, which fell 19.2% to an annualized 113,900 units from 141,000 in March. However, weakness was also recorded in the more stable urban singles component, which dropped 11.3% to an annualized 71,500 from 80,600 in March. Some offset was provided by starts in rural areas, which rose 33.2% in the month to 28,500 units.

Four of the five major Canadian regions showed declines, led by the Prairie region where starts dropped by 26,000 units (44.5%). Smaller unit declines were recorded in Ontario, Quebec and the Atlantic region. British Columbia was the only region to record an increase, with starts rising by 5,100 units (17.1%).

Some weakening in April housing starts was widely expected given the unsustainably high levels of activity recorded in the previous two months. As well, the deterioration in housing affordability through the end of last year will likely increasingly have the effect of easing demand for new homes.

However, the ongoing financial market volatility and attendant rise in the cost of capital present the risk of even a more pronounced slowing in residential construction going forward. To address this downside risk to housing and other key areas of spending such as business investment, the Bank of Canada has been lowering the overnight rate to a current 3.00% from a previous peak of 4.50%. Our forecasts assumes that, with one final 25-basis point reduction next quarter, sufficient stimulus will have been injected into the system to sustain growth near-term and to allow activity to rebound during the second half of this year and through 2009.

Light data day in the United States

The only economic data releases today in the United States are initial jobless claims and wholesale inventories. The trade balance data for March will cap off the week on Friday.

Initial jobless claims for the week ended May 3 slipped to 365,00 and continuing claims for the week ended Apr 26 registered 302,000. These levels are consistent with those observed a few months into both the 1990-1 and 2001 recessions. However, in both of the prior recessions, claims continued to spike higher until the end of the recession and so significant further deterioration would be required for confirmation of the notion that the economy is in recession.

We expect the U.S. trade balance to have narrowed very slightly in March after the unexpected deterioration in February. Exports likely increased, although a decline in durable goods shipments suggests a muted gain. We look for nominal imports to have advanced slightly, with a big assist coming from surging crude oil prices, although subdued domestic activity indicators suggest a modest increase. Net trade is expected to add 0.5 percentage points to U.S. economic growth this year, which will help offset continuing declines in residential construction.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.