"As housing goes so goes the economy," is one economist's assessment of the latest batch of worst-than-expected housing construction data.
Canadian housing starts plummeted nearly 19 per cent in January, suggesting that new construction this quarter "may be losing momentum faster than even we had anticipated," said David Madani, an economist at Capital Economics.
Even though it's possible those figures are so-called statistical noise, other recent data may support a worsening scenario.
"Coupled with the corresponding slump in building permits over the past couple of months, however, it is clear this is no statistical fluke, but rather the start of a severe downward trend. With pre-construction condo sales in Toronto falling by almost 50 per cent late last year, the drop in construction activity is going to get a lot worse," Madani said in a note on Monday.
The seasonally adjusted annualized rate of housing starts dropped nearly to 160,577 units in January, down from 197,118 in December, the Canada Mortgage and Housing Corp. said late last week. The reading was weaker than the 195,000 starts the market was expecting.
CMHC also said starts in Canada were trending at 203,208 units in January. The trend is a six-month moving average to account for swings in monthly estimates, it says.
Immediately after, other economists suggested one month's data is not enough to spark a trend and that the housing market is undergoing a gradual cooling.
Still, recent economic data on external trade and payroll employment "have not been kind," added Madani, suggesting that fourth-quarter growth was only 0.8 per cent annualised and a growing drag from housing implies there will be little, if any, acceleration in economic growth in the first quarter of this year.
"Based on those starts and permits figures, our calculations point to an annualised decline in residential investment of as much as 14 per cent in the first quarter of this year, subtracting almost a full 1 per cent from GDP growth," he said.
On top of the direct impact on GDP through lower construction activity and employment, there is likely to be an indirect impact on consumption. That could be the case once the decline in house prices, which has already begun in some areas like Vancouver, spreads, he said.