Canadian housing starts surprised on the upside for June, jumping 6.3%.

Starts of both singles and multiples were strong says RBC Financial “Single starts rose 4.5%, with gains in all regions of the country except British Columbia where urban single starts declined by 3.8%. Multiples rose 11%, with the biggest increases in Ontario and the Prairies and declines in Atlantic Canada and Quebec.”

“Ongoing strong demand coupled with low inventories fuel the continued strength in homebuilding. Demand is strong because confidence remains high, reflecting the lagged effects from 2002¹s employment boom, because alternative investments are still perceived to be riskier than homeownership and because interest rates remain low. These factors will support the market through the second half of the year,” it says.

BMO Nesbitt Burns sees a couple of other reasons behind the resilience, too. “Although employment has fallen for two straight months through May, and is likely to drop again in June, other factors — low mortgage rates, low inventories of existing homes for sale, and solid consumer confidence – have continued to provide support for the housing market,” it says.

However, Nesbitt sees a few areas of concern. “Single starts are down 4.7% from a year ago, condominium construction in Toronto will likely cool off as the market is becoming saturated, and mortgage rates are starting to rise as bond yields have increased. Add in the cooling of the job market, and home building has likely peaked for this cycle.”

RBC also predicts that the trend will be toward weaker homebuilding activity. “One, the mid-2003 job market has been weak. Two, demand pent-up during the last decade is in the process of being satisfied. Three, interest rates will eventually rise, reducing the attractiveness of owning compared to renting,” it explains.

TD Bank agrees that housing starts are likely to lose some ground in the coming months, but it suggests that the decline will prove modest. “Weaker employment growth is anticipated to dampen demand for new homes. However, with mortgage rates to remain at the lowest level in more than four decades and with the national average of new home prices expected to rise at only a moderate pace of slightly above 4%, the resulting high levels of affordability will keep starts at a strong pace. Accordingly, starts are only expected to dip towards 190,000 units by year-end,” it predicts.

“In 2004, rising mortgage rates are expected to further constrain new home markets. As economic growth accelerates, higher bond yields will push mortgage rates upwards. This may initially lead potential buyers to enter the market in order to avoid the increase in borrowing costs, but the inevitable final result will be to slow the pace of buying and building,” TD says. “As a result, we expect housing starts to gear down to 180,000 units over the course of next year. But, as indicated above, this pace of building would still represent a healthy performance.”

In the short term, Nesbitt says that the strong performance of housing starts in June, coupled with the jump in the Ivey PMI, takes a great deal of pressure off the Bank of Canada to cut rates next week. Although Friday’s employment report for June will be the big deciding factor.