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 F! j1 K: a" U& ^3 w9 Qunsustainable levels of building. Our view is that house
4 R3 A! w" L/ b; n+ Dprices exceeded the value of housing that was justified by
( g4 o& K; V6 j4 @& yfundamentals by approximately 9% nationwide. This
overpricing compelled a level of residential construction
that exceeded its fundamental-justified level by approximately
0 @8 Y* m  o" T5 m% w12%, an excess that was exaggerated in the past
three years.
4 d) f8 w. D* H$ J3 E4 wBy “overpricing” we mean that prices detached from
! z$ ^/ p! C, m" }* p* htheir fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
) Q" @" {4 h; i$ wboth a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
% P7 b' s; B" C+ N! `2 y2 @+ ewhere 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
' d3 x4 _. t0 J3 S; v: e“overbuilding” was mainly of the first type, where
+ J0 V7 G$ f6 ehomebuyers pushed homebuilding to an unsustainable pitch
that is now being rapidly reined in.
5 j- X% @; F' r# ZWhile most markets won’t face U.S.-style overhangs,
. E7 [. e+ a/ Z% I2 ]  ]" ?the construction of too many new homes over the boom
means a deepened slump. This overbuilding will likely weigh
0 F0 o5 o' H) h. Q1 zon markets over the next few years. Even as Canada recovers
3 e) X9 v. [( X- r  q( `from the cyclical downturn, house price growth will
8 J$ f+ s5 a- m& y; @/ K3 ^1 Wremain 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
& f, [5 j5 X6 L; ?" Q* e% c& d/ @) ~residential construction will fall further to around
125,000 starts over 2009 with a trough around 115,000 units
6 K& B5 x5 Q( ~$ U7 Z7 S  K% }0 bin the fourth quarter.
To quantify the degree of overpricing and overbuilding,
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
+ M0 I7 D3 m+ Bvalues since house prices should track incomes over the
long-run. Since homebuilders build to meet demand, we
: U3 e$ D, N7 A) Vregard housing prices and household formation as the drivers
of residential construction.
& G  J, ^" e$ a6 {" ATo examine the degree of overbuilding, we employ a
“counter-factual,” asking what level of residential construction
- M2 V$ ~1 |2 r8 \2 N: ywould have occurred if housing had been priced
2 K& {" v# q/ u' D! v  I/ ]" H- Ioptimally. We find that actual homebuilding exceeded this
fundamental-justified level by about 12%. Although new
( p3 w3 q8 X  {1 r# D% R. Xunits were being absorbed, homebuyers simply bought too
, I- n, C  R" ~' V0 ^5 ]) S5 m5 xmany houses at prices that exceeded fundamentals.
Regionally, we see the greatest strains on the Prairies,
8 c' [, k: T0 K# ]where housing demand will further contract under waning
8 n. u2 A$ G- C; Opopulation inflows. Saskatoon, Calgary and Edmonton are
6 T, J( D3 v1 d4 T, g/ G7 x7 n5 yalready witnessing surges in their unsold new homes at the
+ o$ m% Y! `* w! U/ a0 w) k7 D& [very time that the resale market has swung into strong
: a0 Y4 B8 o, [7 s8 J0 R$ _buyers’ territory. Homebuilding in the Atlantic provinces
! P5 x+ ?" R: X' ^2 X7 `5 Phas been relatively balanced but, while not plagued by structural
weakness, will be singed by the downturn nonetheless.
! w5 U# G7 i4 A2 U5 o# pQuébec shows signs of strain – especially given the
- @$ c3 a, b  _6 Kstrange 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
. Q. k# K( `& m9 g* u; V1 Prates. While Ontario homebuilding will reel from a
cyclical downturn, the degree of structural weakness appears
, J# w; B, z3 ]  Y$ }7 n3 dlimited – with the important exception of the Toronto
condo market. Both in Toronto and Vancouver, historically
' |: n! _2 O5 ]! e. d4 [( khigh levels of apartment-style units presently under
& S/ v) d* t, j! nconstruction mean that record numbers of condos will
% q; [) Y$ ^8 i9 R6 F; Vreach completion during 2009. If absorption rates fall, as
( |8 }6 Q9 h" [* M; p( gcyclical factors would indicate, condo inventories could
" s( c+ K; l  y5 }2 a* ?1 G! d, b( s! ^# Aspike severely – particularly in Vancouver. However, while
% ?# r5 T. X* G+ N2 ?5 _residential construction in B.C. will definitely droop, we
# D/ E" m+ n$ L3 Lanticipate that the West Coast will continue to benefit from
inter-provincial and international migration over the coming
/ t$ I& O  p4 P3 w+ v3 Tyears, which, along with improvements in affordability,
2 R% e( c4 e( X# gwill alleviate some of the pressure from overbuilding.
6 d) L5 S4 s/ T* h7 WOVERPRICED AND OVERBUILT: CANADIAN HOUSING
& h" ^$ o' r" ^4 a4 _5 c3 @, E' kMARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
4 v  g/ u# y9 V" V4 U9 }2 R/ Z6 Z416-982-8063
& G% E7 [6 ], V( ?Pascal Gauthier, Economist
416-944-5730
% X  I/ ^/ h9 Q  o, C) W5 T4 ~
http://www.td.com/economics/special/gb0409_housing_exec.pdf

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