The Globe and Mail

With a decline in housing starts making headlines Monday, TD Bank economist Pascal Gauthier warns  investors to dig a little deeper into the data.

"While the figures for July are disappointing, one should not read too much into an over-sized drop in multiple starts in a single month," he wrote in a note. "This month-to-month volatility in this market segment is remarkably high on both the upside and downside."

Canadian housing starts slipped to an annualized 186,500 units in July, short of the expected 210,000, according to Canada Mortgage and Housing Corp. Ontario led the pullback as its condo and multiple-unit starts pulled back by 28 per cent. Meanwhile, urban single unit starts decreased at a more gradual 7 per cent across the country.

"The trend in single starts is usually more telling, and it remains consistent with our theme for this sector of the Canadian economy, which is that it should experience a cooling after running too hot for too long," Mr. Gauthier wrote. "A greater number of existing homes for sale and the continued long-term shift to smaller and relatively cheaper multiple-family units will continue to put downward pressure on single family starts over the next 12-18 months."

He said that while multiple starts will ease off from the levels seen in 2008, they will likely settle back around the relatively robust levels seen in 2005-07.

"There will be a natural tendency to read too much into this monthly decline and straight-line these figures forward to conclude that construction is falling off the rails," he wrote. "We think it important to caution observers against such a knee-jerk reaction to this month's CMHC report. Residential construction is easing and should continue to do so, but at a modest year-over-year rate of 3-5 per cent contraction, not July's 16 per cent."