TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
" n" g1 O5 j' u6 N! ]' [from 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
# g2 }+ y. ?8 @2 Nprices exceeded the value of housing that was justified by
" c. Q8 a1 i1 q1 Z3 Jfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
! l: L# G/ Z; m/ [: X: Sthat exceeded its fundamental-justified level by approximately
" x# M/ x, f! r# p( _& d12%, an excess that was exaggerated in the past
three years.
& R0 O( N. D# b+ q% x, m1 K% rBy “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
8 e% m: _/ F  F% a6 T- _affordability. The current unwinding of house prices reflects
  {- R3 m) F- y9 A5 c6 J) D4 |both a cyclical downturn and a return of house prices
to fundamentally justified levels.
4 }' \* M5 e/ j8 TWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
that 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
7 G. |- n" f8 B4 _8 g“overbuilding” was mainly of the first type, where
/ ~# s' @$ @: c, Xhomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
' [( q& ~% a* Ymeans a deepened slump. This overbuilding will likely weigh
on markets over the next few years. Even as Canada recovers
: C  u0 @/ \' r& F) ?from the cyclical downturn, house price growth will
# q4 S* E4 J9 V" Q" y1 F4 p) _remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
# R2 \+ J- E3 w9 a+ X, ]( J0 Ris now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
# \5 \& |" s6 C+ ]! gin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
. k& }& I' l1 W0 ~we first develop an empirical model, based on long-run
fundamentals of house prices and housing starts in each
province. Affordability is the key concept behind home
: {6 _/ `8 ?2 g0 [  ^' e: \6 yvalues since house prices should track incomes over the
7 j; J. M/ {0 Q3 a7 s$ v7 ?# @long-run. Since homebuilders build to meet demand, we
regard housing prices and household formation as the drivers
+ G8 a+ x. S* @! a( S) k  Gof residential construction.
; r4 u" ~- L/ eTo 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
4 g5 d, T/ ]1 e* [1 P+ p3 t7 i9 ]fundamental-justified level by about 12%. Although new
; D9 m- @; n: }; e" Lunits were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
! p3 s, R8 h9 S  M* F) Y2 C9 ewhere housing demand will further contract under waning
  u& r8 O" x( F5 w- Dpopulation inflows. Saskatoon, Calgary and Edmonton are
' L0 [  A+ B( [$ M7 t! n( ?8 h0 {already witnessing surges in their unsold new homes at the
: Q$ |8 j& {% ^5 U$ @& ~4 Nvery time that the resale market has swung into strong
2 l3 y; }! Z) r: W0 cbuyers’ territory. Homebuilding in the Atlantic provinces
8 J) |" D5 L! v- ?, R9 ?& whas been relatively balanced but, while not plagued by structural
' Y8 E' ]( J' z* C2 Lweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
+ @9 W4 Q5 e! o' p7 vstrange accumulation of unabsorbed multiples on l’Île de
Montréal – but recent building has been relatively balanced,
given the province’s history of under-building and low ownership
, V: B6 T( z% S) d& P. h8 k+ Mrates. 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
high levels of apartment-style units presently under
construction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
% [9 \/ r* c1 `9 T0 g: Bcyclical factors would indicate, condo inventories could
spike 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 D) r, ?' minter-provincial and international migration over the coming
1 G  K/ D; u* e# }years, which, along with improvements in affordability,
will alleviate some of the pressure from overbuilding.
7 `5 I9 d/ v5 g! V9 D; x% r6 hOVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
: P4 y: C- F, S6 NGrant Bishop, Economist
; ^; F5 f! L* g6 D3 z% Y' M$ {5 [; S416-982-8063
Pascal Gauthier, Economist
6 x6 _* G8 F, w& n5 L416-944-5730
" W8 E4 z, Q$ b
+ _! A  D' h/ d1 N; L* J, Xhttp://www.td.com/economics/special/gb0409_housing_exec.pdf

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