Housing starts drop more than expected

Home construction has slowed more than expected, and the sector -- which has been an engine of overall economic growth -- was already a drag on industrial activity as early as last spring, a pair of agencies report.

Housing starts fell 10 per cent last month to a seasonally adjusted annual pace of 213,700 -- their lowest level in a year after three straight months of increases, pulled down by a drop in apartment and condominium construction, Canada Mortgage and Housing Corp. reported Monday.

Urban housing starts declined even further, by 11.3 per cent to 179,300 units in August compared to July. Urban multiples decreased 22.2 per cent to 87,800 units in August, while singles were up 2.6 per cent to 91,500 units.

The drop for urban housing starts was even greater in British Columbia, where they fell 21.2 per cent, the biggest percentage plunge of any province.

Double digit declines were also recorded in Ontario, the Atlantic region, and the Prairie region where urban starts were down 19.8, 18.0, and 10.0 per cent respectively. Urban starts were up 19.6 per cent in Quebec.

"Although this outcome was clearly softer than most were expecting, it is hardly a harbinger of doom for the Canadian housing market," said TD Trust economist Eric Lascelles, noting that housing starts are still relatively robust.

Further, residential building plans are still holding up, which bodes well for an ongoing healthy pace of housing activity, and new home prices continue to rocket upward at nearly 10 per cent per year. This, Lascelles said, suggests that, if anything, housing starts are not currently keeping pace with demand.

But housing was already cooling last spring, a separate report from Statistics Canada suggests.

Overall, Canadian industries were operating at 85.5 per cent of their capacity in the spring, down from 85.7 per cent in the first quarter -- the third straight quarterly decline, it said. "Most export-based industries and industries associated with the housing market reduced their capacity utilization in the second quarter," it said

Industrial capacity, a measure of how busy businesses are, was also down from the 87.6 per cent peak reached during the late 1980s housing boom.

The reports, which followed news last week that job growth has stalled, add to evidence the economy is cooling off.

Rising house prices will continue to dampen demand for new homes in the latter part of this year, CMHC chief economist Bob Dugan said.

Bart Melek, BMO Capital Markets economist, also warned the storm clouds gathering over the U.S., a softening employment environment, and higher interest rates will all gradually erode activity in the coming months.

But mortgage rates "have moderated recently" noted J.P. Morgan economist Ted Carmichael

(prepared by Eric Beauchesne/CanWest News Services)