TD Bank:OVERPRICED AND OVERBUILT: CANADIAN HOUSING

依勒特

During Canada’s “Housing Boom”, which ran roughly
1 i) g1 f1 V, b, o+ cfrom 2002 to 2008, unsustainable price increases drove
unsustainable levels of building. Our view is that house
prices exceeded the value of housing that was justified by
fundamentals by approximately 9% nationwide. This
5 u; n$ ?0 _' S+ Joverpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
* e2 ]" }6 h+ M) D) |  [" u* n  A0 Z12%, an excess that was exaggerated in the past
three years.
. t6 H; ^) C2 x4 j) FBy “overpricing” we mean that prices detached from
4 \& q2 A  S' o* \their fundamentals, as witnessed by a steep erosion of
# G  b8 W0 W( @/ n5 z: raffordability. The current unwinding of house prices reflects
2 ~3 p7 R" \* \  i3 F8 l) ?both a cyclical downturn and a return of house prices
3 K# L$ s! Y  R5 _* {5 K6 Zto fundamentally justified levels.
- A$ ]3 o9 |& e1 U% r9 W% jWe consider “overbuilding” of two forms: “demanddriven”
where homebuyers buy up too many houses and
" V" Q8 E" W3 sthat 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
! c) L. l2 L+ q! K5 M“overbuilding” was mainly of the first type, where
" z0 a5 G2 v* w$ o9 Ihomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
+ T/ \+ _+ O6 }While most markets won’t face U.S.-style overhangs,
the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
% {; X7 @" g! r2 @6 D6 A+ ~on markets over the next few years. Even as Canada recovers
8 D* |. q9 e  O$ y$ u( Hfrom the cyclical downturn, house price growth will
4 U# x+ g: L9 ~& j7 \1 x4 O+ }3 z9 xremain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
0 ?9 u# @' D+ D& ?is now undershooting fundamentals and we expect this
to persist over 2009 to 2011. We anticipate that nationwide
residential construction will fall further to around
- V. Y4 S. \; I' Y; g  ^- p' a" ^125,000 starts over 2009 with a trough around 115,000 units
in the fourth quarter.
8 ~+ t* z& M0 j) V4 W' GTo quantify the degree of overpricing and overbuilding,
& y8 k8 t& ^9 o+ [' ewe first develop an empirical model, based on long-run
8 K& S* C! ?& ?0 Y5 L5 bfundamentals of house prices and housing starts in each
) p0 P" o1 D, {$ [3 A$ pprovince. Affordability is the key concept behind home
values since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
% n# ^' x7 a/ ?: C$ [% W9 Q+ S; Yregard housing prices and household formation as the drivers
% v+ T2 s9 }7 n0 b1 u: y+ s  u" O) Wof residential construction.
To examine the degree of overbuilding, we employ a
" ?6 S, P# @0 {" L4 r“counter-factual,” asking what level of residential construction
would have occurred if housing had been priced
- W, q+ t& B. l" Q/ \+ Hoptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
many houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
. B" U3 z" {" S3 V; p' D: O9 M: ewhere housing demand will further contract under waning
population inflows. Saskatoon, Calgary and Edmonton are
already witnessing surges in their unsold new homes at the
' C$ C5 }7 k6 ^1 j1 Fvery time that the resale market has swung into strong
' _6 F; O, D7 e' z2 d4 `7 ?buyers’ territory. Homebuilding in the Atlantic provinces
has been relatively balanced but, while not plagued by structural
3 n7 W, f2 T/ V1 L/ ^' c! f& _weakness, will be singed by the downturn nonetheless.
! y: \% J- z: I( x: UQuébec shows signs of strain – especially given the
strange accumulation of unabsorbed multiples on l’Île de
3 o) K1 [- O  ]( Q7 m% BMontréal – but recent building has been relatively balanced,
  w  S( _$ V* ?- h' \given the province’s history of under-building and low ownership
- I7 v6 o( C3 f3 j. i/ I) ~& Krates. While Ontario homebuilding will reel from a
: S8 b$ Y) w/ V& e: ?cyclical downturn, the degree of structural weakness appears
9 h( u- ]. v7 o' D4 {limited – with the important exception of the Toronto
) ?3 P. g4 ]4 |condo market. Both in Toronto and Vancouver, historically
! C/ R* E" o1 Shigh levels of apartment-style units presently under
2 |1 `, V' Y/ y3 W3 r- `7 U# zconstruction mean that record numbers of condos will
reach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
spike severely – particularly in Vancouver. However, while
" w( P, D! k3 F' Yresidential construction in B.C. will definitely droop, we
anticipate that the West Coast will continue to benefit from
( d+ q* f" q0 t% U; c& Q/ M) i" Ninter-provincial and international migration over the coming
0 S- [: Z4 b) c9 O( I( V& iyears, which, along with improvements in affordability,
% V0 R, x/ q% Dwill alleviate some of the pressure from overbuilding.
OVERPRICED AND OVERBUILT: CANADIAN HOUSING
MARKET RETURNS TO FUNDAMENTALS
5 ]+ W2 ?! _8 D' O  m0 LGrant Bishop, Economist
416-982-8063
Pascal Gauthier, Economist
8 x1 U: L3 H" l) R5 X0 ]( D& [416-944-5730
4 A+ u: s0 R' q1 d) x" j
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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