Canadian housing starts exploded in June, underscoring residential construction as an area of strength in a weakening economy, and possibly scotching further cuts to interest rates.

BMO Nesbitt Burns says the housing data “smashed expectations of a modest gain in June, rising a whopping 13.7% to 176,200 units annualized. This represents the highest number of starts since September 1991, and provides support for the view of a second half turnaround following interest rate cuts by the Bank of Canada in the first half of the year”.

The volatile multiple-units sector jumped 24.6%, and single-unit starts rose a steady 8.3%. BMO says the single-unit results follow three-straight months of declines, so some recovery was expected, and the multiple results are notoriously volatile. Nevertheless, there’s no sugar-coating it — economists blew this call, they expected flat results.

“While the report is not quite as strong as the headline figure would suggest, it’s still pretty darn strong,” says RBC DS Capital Markets Research. “Today’s report represents a cyclical (and nine-year) high in starts, suggesting the momentum in this key element of Canadian domestic demand is as strong as ever. Higher mortgage rates and lower growth in wealth and incomes will likely take their toll in [the second half], but the resiliency of the sector remains impressive.”

“Housing remains an area of strength in the Canadian economy, and stands in stark contrast to manufacturing,” says BMO. “By itself, this report decreases the likelihood that the Bank will cut rates next Tuesday. The manufacturing sector would appear to require further cuts, but with the more interest-sensitive housing sector remaining strong and 125 basis points in cuts in the first half of 2001, the Bank may feel it can wait this one out.”

RBC DS disagrees, suggesting that a small cut is still in the cards. “A robust construction sector has been part of the Bank of Canada’s view throughout 2001, and while today’s report will no doubt intensify that more optimistic/hawkish end of the Bank’s thinking, it isn’t a view-changer,” it insists. “As such, a 25 bps rate cut remains the likeliest outcome of next Tuesday’s announcement, though today’s report must reduce the odds at the margin.”