Housing starts sank 13.6% in July to an annualized 186,500 units from a downwardly revised 215,900 in June (originally reported as 217,800). Expectations had been for a relatively modest 3.6% decline. However, the weakness was likely slightly overstated with the drop largely concentrated in Ontario, which contributed 30,300 units to the overall national decline in starts.

The drop in starts reflected weakness in both urban singles and multiple units, dropping 6.6% and 20.2%, respectively. The latter can be quite volatile month to month with the singles component historically more indicative of the underlying trend in the overall housing market. As well, the weakness was almost solely concentrated in Ontario, where starts dropped 38.8% to an annualized 47,800 in July from 78,100 in June. The Prairie region saw activity move lower as well, although by a relatively modest 1.6%. All other regions/provinces showed small increases.

Housing activity is definitely on a downward trend consistent with indications of deteriorating affordability through last year. This factor is expected to keep new residential construction activity under downward pressure going forward. Our forecast assumes that starts will drop on average 5.3% this year and 14.8% next year. (The level of 2007 starts was relatively unchanged compared to 2006.)

Forecast declines for this year and next represent a modest pace of slowing in contrast to the crash in activity in the United States, where starts fell 26% last year and are expected to decline another 30% this year before modestly recovering 5% in 2009. However, given the experience in the United States, the unexpected weakness in July housing markets will likely keep the Bank of Canada wary about ratcheting up the still relatively stimulative 3.00% overnight rate. We expect that downside risks to growth will result in the central bank maintaining rates at current levels through the remainder of this year.

U.S. markets to take cue from data this week
There are no U.S. economic reports today, but a reasonably busy economic calendar for the week as a whole. With second-quarter earnings reports largely (and thankfully) in the rear view mirror - 453 of the S&P500 companies have now reported - markets are now more likely to take direction from the combination of this week's activity repots and from foreign exchange market developments after the U.S. dollar enjoyed its best weekly performance on a trade-weighted basis since the beginning of 2005 last week.

This week's economic data will be largely unaffected by gas price movements (they were flat from June to July), the highlights being the trade balance on Tuesday, retail sales on Wednesday, inflation on Thursday and industrial production/capacity utilization on Friday. While these reports are not expected to be barn-burners (core retail sales expected up 0.5%, for example), negative growth surprises are coming more from abroad than in the United States at this stage and may keep the U.S. dollar supported.