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Housing-starts drop dramatic, CMHC says

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Toronto Star Article - May 8 - Housing-Starts drop dramatic, CMHC says

OTTAWA — Housing starts fell by a dramatic 13.3 per cent in April from one year earlier, a surprising signal of weakness in what has been a buoyant sector of the economy.

Residential construction starts dropped to an annualized rate of 218,100 last month, down from a revised figure of 251,700 reported in April, Canada Mortgage and Housing Corp., said Monday.

Still, the slowdown doesn't mean the party is over just yet for home builders and buyers who have been enjoying a red-hot market, analysts said.

And it likely won't deter the Bank of Canada from raising interest rates, some added.

Western Canada in particular is expected to remain a hotbed of residential construction activity, fuelled by an exploding resource economy, drawing a steady stream of workers, as well as relatively low mortgage rates.

"Despite April's broad-based decline, there are good reasons to believe that the new housing market remains a pillar of strength," said Toronto Dominion Bank economist Sebastien Lavoie.

But watch out for further weakness in Atlantic and central Canada, where economic growth has suffered as tourism and manufacturing weather a soaring loonie that has jumped about 40 per cent in value in the past four years.

By mid-day Monday, the loonie was trading at 89.94 cents US — a bit softer than highs of more than 90.3 cents hit last week.

Monday's housing report surprised financial markets, which had been expecting a seasonally adjusted figure of about 230,000 national housing starts — considerably more than the 218,100 reported.

Some pointed to the volatility often seen in multiple dwelling construction and said the April statistics don't suggest significant weakening in the economy.

And that means the Bank of Canada could raise its key short-term interest rate at its next opportunity on May 24 to 4.25 per cent.

Since last fall, it has raised its trend-setting rate from a low 2.50 per cent to cool the economy just enough to keep a lid on inflation.

Declines in new home construction were noted in every region of the country last month.

But multiple family construction in urban areas was hit hardest, dropping by 22 per cent — its lowest level since last August, said Lavoie.

Construction starts on single-family homes also fell last month by six per cent, marking the third straight negative month.

That was a fairly mild, orderly slide compared with the upheaval in multiple-unit construction, noted CMHC.

Quebec saw a whopping drop of 24.7 per cent in multiple family dwellings while a 20 per cent decline was reported on the Prairies.

April's total of 96,500 multiple-unit starts was significantly less than the 123,000 reported in March.

"Multiple starts gave back all the gains registered last month," said Bob Dugan, chief economist at the agency's market analysis centre.

"In contrast to the volatility in multiple starts, the pace of single starts is slowing consistently as expected."

Multiple dwelling starts tend to be volatile, so the dramatic movements in April don't mean the housing sector is sinking, said Bart Melek of BMO Nesbitt Burns.

With an unemployment rate of 6.4 per cent in April and interest rates relatively low, the housing market may cool but shouldn't crash, he said.

"We see evidence that the housing sector will continue moderating towards a soft landing amid a very solid employment picture and still-low borrowing costs, which will support the sector."

In Ontario, total urban starts were down 12.2 per cent with single urban starts declining more than multiples.

The declines in the Atlantic region and British Columbia were relatively modest at 6.5 per cent and 2.3 per cent respectively.

Rural starts in April were estimated at an annual rate of 31,100.

In the first four months of 2006, actual urban starts were up 8.3 per cent when compared to the same period a year earlier.
 

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