The seasonally adjusted annual rate of housing starts dropped more than expected in January, falling 8.7% in the month, Canada Mortgage and Housing Corp. reported Monday.

“This year is off to a solid beginning, since in the past 10 years only 2002 had more starts in January,” said David Weingarden, senior economist at CMHC’s Market Analysis Centre. “Low mortgage rates, along with growing employment and increasing incomes continue to support the housing market.”

Canadian housing starts dropped more than expected in January, falling 8.7% in the month.

BMO Nesbitt Burns points out that this was the smallest number of starts since December 2001, and it broke a string of three straight months where starts were above 200,000 units. “However, the decline last month represents a modest pullback after the strongest year for the housing market in over a decade,” says Nesbitt.

“While this is still a strong showing by any measure — and is still well above the long-term demographic replacement rate of about 165,000 units — it also represents the third monthly slip in starts, leaving little doubt that the pace of construction activity is cooling off,” notes TD Bank. “Moreover, January’s decline was broadly-based. Both urban single starts and the more volatile multiple component recorded declines last month, with the former recording a 7.9% drop, and the latter posting a 8% decline.”

The drop in starts can partly be attributed to the cold weather says Nesbitt, noting that starts are down 17.2% from the same month last year when the weather was unseasonably warm.

“It is very likely that the unseasonably cold temperatures gripping most of the country in January gave Canada’s red-hot home building sector a minor case of the sniffles,” agrees RBC. “With residential permit issuances remaining strong, the blast of cold winter weather may have simply forced homebuilders to delay the initiation of any new projects last month. The fundamentals behind the housing sector remain as solid as they have been over the past year.”

TD agrees that the weather may be to blame for the drop, but it notes that housing starts are quite simply not sustainable at last year’s pace of more than 200,000 units. “Notably, the resale market has already started to gear down a notch, and the kick to housing demand from the extremely low levels of mortgage rates is at least partially been spent. And, looking ahead, while low borrowing costs will continue to put a solid floor under Canada’s housing market in 2003, interest rates are going to be heading up over the course of the year. As a result, we expect total housing starts to clock in at a more modest – albeit more than respectable – clip of 185,000 units for the year as a whole.”

RBC expects that housing starts will maintain their 200,000 units pace for the better part of 2003.

BMO says, “The fundamentals of the housing market are still supportive, and homes remain affordable. However, with interest rates likely to head higher, and job growth to be less robust this year, activity in the Canadian housing market is set to post a less impressive performance compared to 2002.”

“All told, today’s data should go a long way towards quashing any lingering concerns that a late-1980s-style bubble may be brewing in Canada’s housing market – and, together with last Friday’s employment data, may help to turn down the inflation alarms at the Bank of Canada as well,” concludes TD.