Canadian housing starts dropped a greater-than-expected 22.4% in November to an annualized 172,000 from 211,800 in October. Market expectations had been for a more moderate decline of 6% to 199,000. The lion's share of the weakness was concentrated in the volatile multiples component.

Housing starts for most of this year have been stronger than expected, benefitting from strong urban multiples activity. This strength saw a sharp reversal in November with this component dropping 29.1% to an annualized 81,700 units. Urban singles fell as well, although by a more moderate 9% to an annualized 63,100 units. Rural starts remained unchanged at 27,200 units.

Declines were evident in all major provinces and regions, with the biggest declines occurring in British Columbia (-35.8%) and Ontario (-30.7%). This weakness in these two provinces likely reflected the drop in the multiples component. However, the Atlantic region saw a decline as well of 20.8%, while activity in the prairie region dropped 12.6%. Activity in Quebec fell by a very moderate -0.5%.

The further weakening in housing starts is consistent with housing affordability continuing to be impaired and sales activity trending lower. However, the pace of decline in housing starts continues to remain moderate despite the larger-than-expected drop in November. Relative to an annual peak in starts of 229,000 in 2006, the level of activity in November is down 24%. In the United States, the most current level of starts for October 2008 of 791,000 is down a phenomenal 62% from the annual peak of 2.073 million units reached in 2005.

Although starts in Canada are expected to move still lower through next year, the overall decline is still likely to be about one-half the drop registered in the U.S. housing market. However, to limit the extent of any weakening in Canada and temper the spillover from the U.S. recession, we expect that the Bank of Canada will continue to ease policy, with the overnight rate expected to drop 50 basis points to 1.75% at tomorrow's policy-setting meeting.

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