TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
# x: r9 i% E& ^* C  s3 h$ L  |from 2002 to 2008, unsustainable price increases drove
- d  x, V6 V" E* j; g  Tunsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
1 W5 J! |% |  i9 H  Lfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
12%, an excess that was exaggerated in the past
. G4 m- {2 x3 x/ ^6 q8 h* rthree years.
$ S' ~3 G5 e3 ~$ l. v1 ^$ X! I$ xBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
$ p" F1 `/ o; d' `. Iaffordability. The current unwinding of house prices reflects
% s( r+ S& F7 _0 }# Y% Rboth a cyclical downturn and a return of house prices
0 D% {3 d% ]7 @$ o4 S" f: ato fundamentally justified levels.
* U' a) b8 ], _1 ?We consider “overbuilding” of two forms: “demanddriven”
8 T. J. N- K+ [" c# n5 |# Xwhere homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
: Y1 O2 v3 `: a  Y8 R6 L( @- ~there is evidence of both types, we contend that Canada’s
) a/ p7 f5 i- S: `1 O; o“overbuilding” was mainly of the first type, where
. Z! D; E$ y; z0 `homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
" N. Y0 t7 u3 Y$ u* {" B3 UWhile most markets won’t face U.S.-style overhangs,
7 a( s8 L" v1 c+ n3 Nthe construction of too many new homes over the boom
$ m% m1 K; R: S* u! I2 w& cmeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
7 z1 |  W: x1 ]; @) n2 ]$ cresidential construction will fall further to around
  x; J0 B2 i6 @' U6 e" ~( X125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
To quantify the degree of overpricing and overbuilding,
# {; Q8 e/ t+ i3 v3 [3 g& Ywe first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
( ]9 u: m# d, M( eprovince. Affordability is the key concept behind home
" O6 I: f4 p) S0 m# Z  T# D; Evalues since house prices should track incomes over the
/ U, x* s- c7 ^- u0 vlong-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
5 b) Q) }5 z) c; Aof residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
8 i8 p$ \. t2 z5 H+ A+ e. F$ R: hwould have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
+ S0 A& {' s! @% _* c$ ?( Z2 T, Vfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
* M( N, r# \1 k/ m) E, ?( _Regionally, we see the greatest strains on the Prairies,
' H2 o- @  C- M" P' E* n, |4 swhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
2 D! L9 W! L* y& |& ~; Aalready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
8 m. b5 ?# @- z* H3 `" }" @buyers’ territory. Homebuilding in the Atlantic provinces
/ w5 f- O' _5 u# Q0 j" r# I/ Q+ w+ X1 ~has been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
/ z- @5 z9 m5 j& W; r- Y: [Québec shows signs of strain – especially given the
" t9 m5 K" [' ^! istrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
7 Z' `* b* T" T/ v4 c1 s/ kgiven the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
limited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
+ t# z+ r' ~0 T# y, u5 D" B/ Vhigh levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
) Q& p" b; {" n! J1 _spike severely – particularly in Vancouver. However, while
0 U$ C; `( s. p$ m0 K9 iresidential construction in B.C. will definitely droop, we
- p1 f* C; z& y: `0 A. v4 Banticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
; h( l, K* U7 r* cwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
# Z0 U2 u) x. C: sGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
! q* U5 O: d- ]% M8 H416-944-5730

( g+ J, ^: F( W& nhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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