Saturday, October 14, 2006


October 10, 2006

* Housing starts down modestly to 211K in September
* Recent trend consistent with soft landing scenario
* Downtrend in Canada not as rapid compared to the U.S.

September’s housing starts came in at 211,300 annualized units, a notch lower than in the previous month. Even though this figure is the lowest one registered since August 2005, this is no big deal. What is more important to notice is that the recent trend in starts is consistent with our scenario of a soft landing. Housing starts averaged 222,000 annualized units in the third quarter of this year, only a touch lower than the 229,100 units in the second quarter, and this follows a cyclical high of 247,600 units in the first quarter.

What’s more, the Canadian new housing market is not cooling off like in the United States. Housing starts in Canada were down only by 6.6 per cent on a year-over-year basis in the third quarter. South of the border, the decline is much heavier, about 20 per cent. The softer downtrend on this side of the border is explained in part by lower mortgage rates, stronger job creation, and better financial health among households. Also, Canada has an additional card in its hands that the U.S. does not have, Alberta. In the third quarter, starts in this province were up 21 per cent from last year. But, even excluding red-hot Alberta, starts in the rest of the country were only down by 7.3 per cent, still a fraction of the decline in the United States. In fact, starts in the third quarter were also stronger than a year ago in three other provinces: P.E.I., Nova Scotia, and New Brunswick. In the U.S., starts are down in every region.

Slicing starts by housing type reveal a similar story. Both starts of multiple and single units are cooling off rapidly in the United States. In Canada, the picture is mixed. Single starts bounced back in the third quarter of 2006 and were up by 3 per cent from a year ago. Multiple starts, however, lost some steam in August and September. As such, starts in this segment of the market were 12 per cent below the level observed in the third quarter of last year.

We believe this gentle downward path observed in Canada is likely to continue in the last quarter of this year as well as in the next two years. For further details, see the latest edition of TD Economics’ Provincial Economic Update, which contains housing starts forecasts by province for 2007 and 2008.

S├ębastien Lavoie, Economist

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