TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
from 2002 to 2008, unsustainable price increases drove
4 Z5 ?7 A) c0 O+ k6 W- E$ ]unsustainable levels of building. Our view is that house
: E3 p: g3 @" ?, Q9 tprices exceeded the value of housing that was justified by
! O! D) M6 f2 a1 w& w# A& dfundamentals 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
, c( w" S! c$ `% m/ K4 r. d3 K0 athree years.
  ?+ u, i* W7 A+ {  L: z0 N: MBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
$ m$ \6 `  o9 ?both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
+ n9 w: s5 ]3 [  U* ywhere homebuyers buy up too many houses and
2 l. a* V6 Z" c! {& dthat this demand cannot be sustained; and “supply-driven”
where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
“overbuilding” was mainly of the first type, where
homebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
1 E$ _0 K% A& R  G2 Z: YWhile most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
, {) J- y  r7 |, m) e% zmeans a deepened slump. This overbuilding will likely weigh
( j4 ~3 j5 _) ~on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
5 C- {! E  s) V( Wremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
1 [+ x  t! w+ D8 ?+ M" ^/ r2 _  U' iis now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
, b8 K# F" j1 z1 Y9 B3 A# f& |8 {" i125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
/ h; O3 |' I4 `) Y3 S: s: U; XTo quantify the degree of overpricing and overbuilding,
0 R! X! g: N# |  s2 ~. b! K! s5 Twe first develop an empirical model, based on long-run
* y5 ?0 A% w/ B2 O" h4 G! f$ ^fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
6 c, u' r& `! w, n9 D4 z5 ~! ]: Pvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
of residential construction.
To examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
optimally. We find that actual homebuilding exceeded this
& c0 ^  T, m3 h: dfundamental-justified level by about 12%. Although new
) |- K" Z3 j8 H3 |units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
5 Y6 p( ]3 Z+ ~) PRegionally, we see the greatest strains on the Prairies,
' E* S  X/ N8 r  e- a- dwhere housing demand will further contract under waning
7 E; }8 @$ |  D9 a0 ]4 F2 @- U# F# Npopulation inflows. Saskatoon, Calgary and Edmonton are
7 e6 T: D$ i6 @- V# e( Z# Walready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
# E/ N) I" P- Bbuyers’ territory. Homebuilding in the Atlantic provinces
& d8 `/ U5 ]. U$ |" w# khas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
7 ~5 @# |0 V+ ~; s( W. e# i! r' ]Québec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
5 u9 L+ F9 ?7 nMontréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
rates. While Ontario homebuilding will reel from a
9 N2 U+ A% v1 J" ^6 Ncyclical downturn, the degree of structural weakness appears
. ^& g: z' J7 d8 j3 }1 ilimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
7 e3 s3 z9 h6 Y  bhigh levels of apartment-style units presently under
# c9 [( `- b' J6 Aconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
$ g- s; U" n6 @: B$ a( jspike severely – particularly in Vancouver. However, while
residential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
6 m: `7 R0 J, q% i& K* O5 q8 r0 B  Hinter-provincial and international migration over the coming
years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
1 J) w4 _0 o' s) eOVERPRICED AND OVERBUILT: CANADIAN HOUSING
; ]0 v! E* j6 d9 V! \, X8 W9 VMARKET RETURNS TO FUNDAMENTALS
& P8 ~  M+ g6 n% O3 p$ g& CGrant Bishop, Economist
416-982-8063
- z/ X  w- Q  |% \Pascal Gauthier, Economist
8 }& P/ g; J, ]3 c3 X& ?% ]; Q416-944-5730
1 G6 G' ]$ ^! ~  ~* s) n  T; ~
$ f3 O9 m( |" ahttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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