Canada’s seasonally adjusted housing starts came in at 238,000 in January. This was below the expected 263,300.
The year-on-year result points to fewer new homes starting than forecast. The data shows a shortfall of 25,300 compared with expectations.
The unexpected drop in January housing starts to 238K signals a significant cooling in the construction sector. This weakness suggests that the restrictive interest rates maintained throughout 2025 are finally having their intended impact on the broader economy. For us, this data point strengthens the case for a more dovish stance from the Bank of Canada in its upcoming meetings.
We should anticipate a downward shift in Canadian government bond yields as rate cut expectations move forward. The overnight index swaps market is already pricing in a 65% chance of a rate cut by the April meeting, up from 45% just last week. This makes positioning for lower rates, perhaps through call options on bond ETFs or long positions in BAX futures, an increasingly attractive strategy.
A softer outlook on domestic interest rates typically weakens the Canadian dollar, especially against the greenback. With the latest US non-farm payrolls from two weeks ago showing surprising strength, a policy divergence between the Fed and the BoC is becoming more pronounced. We should therefore consider strategies that benefit from a rising USD/CAD exchange rate.
This housing slowdown directly threatens the profitability of Canadian banks and real estate investment trusts. We saw a similar dynamic in late 2024 when high borrowing costs first started to bite, leading to a 10% drop in the S&P/TSX Capped Financials Index over that quarter. Consequently, buying puts on financial and real estate sector ETFs could offer a valuable hedge against a potential slowdown in domestic credit growth.
