Canada’s seasonally adjusted housing starts were 238,000 in January. That was below the expected 263,300.
On a year-on-year basis, the data also suggests fewer new homes are starting than forecast. Starts were 25,300 below expectations.
The surprise drop to 238K in January points to a clear slowdown in construction. It suggests the high interest rates in place through 2025 are starting to work their way into the wider economy. For us, this supports a more dovish Bank of Canada in the next few meetings.
We should expect Canadian government bond yields to move lower as markets pull forward rate-cut expectations. The overnight index swaps market now prices a 65% chance of a cut by the April meeting, up from 45% last week. That makes positioning for lower rates—such as call options on bond ETFs or long positions in BAX futures—more appealing.
A softer outlook for domestic rates usually weighs on the Canadian dollar, especially versus the US dollar. US non-farm payrolls from two weeks ago surprised to the upside, which makes the gap between Fed and BoC policy more obvious. We should consider strategies that benefit from a higher USD/CAD exchange rate.
This housing slowdown also risks hurting Canadian banks and real estate investment trusts. We saw a similar pattern in late 2024, when high borrowing costs began to bite and the S&P/TSX Capped Financials Index fell 10% that quarter. As a result, buying puts on financial and real estate sector ETFs could help hedge against weaker domestic credit growth.
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