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
unsustainable levels of building. Our view is that house
4 `" h: x) b  R, l/ Rprices exceeded the value of housing that was justified by
fundamentals 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
; Y& r+ [. V) Othree years.
By “overpricing” we mean that prices detached from
their fundamentals, as witnessed by a steep erosion of
affordability. The current unwinding of house prices reflects
# m1 l0 o# o" ~4 N6 V1 Q- Z0 Y' \both a cyclical downturn and a return of house prices
to fundamentally justified levels.
We consider “overbuilding” of two forms: “demanddriven”
! k5 a4 E) A  ?7 p+ {where homebuyers buy up too many houses and
that this demand cannot be sustained; and “supply-driven”
$ j3 s$ c& E" ~: |2 H4 J4 ~where builders accumulate excessive inventories. Although
there is evidence of both types, we contend that Canada’s
/ Z/ q( n! I& s# ]6 ], K“overbuilding” was mainly of the first type, where
# g' a! H  q# B9 [6 Yhomebuyers pushed homebuilding to an unsustainable pitch
9 N$ M5 x. Y4 bthat is now being rapidly reined in.
+ e* R# n% D9 R" Y  P4 hWhile 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
! m- R: S# }" j4 z9 }on markets over the next few years. Even as Canada recovers
from the cyclical downturn, house price growth will
/ U1 R/ ?6 W) g- F' [remain choppy and new residential construction will be
dampened, owing to this structural weakness. Construction
9 f. T0 c. K6 ?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
125,000 starts over 2009 with a trough around 115,000 units
5 F6 q! B2 S; Y9 ain 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
6 c/ }7 i  R/ a7 `9 }) \# Yvalues since house prices should track incomes over the
0 m8 K6 N' n- ]8 e& X  w! Blong-run. Since homebuilders build to meet demand, we
9 `4 q* P2 p0 r% m5 mregard 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
2 n# B6 ^1 z& q/ A- tfundamental-justified level by about 12%. Although new
units were being absorbed, homebuyers simply bought too
, m0 y" t# r1 S6 [* Wmany houses at prices that exceeded fundamentals.
) A2 c/ L' r- y4 H- P( l! S1 aRegionally, we see the greatest strains on the Prairies,
where housing demand will further contract under waning
8 x8 s. @5 N0 G8 U: E/ X7 D4 R4 v* [population inflows. Saskatoon, Calgary and Edmonton are
+ ^" u4 t. E3 I- h& p, V( c9 ralready witnessing surges in their unsold new homes at the
very time that the resale market has swung into strong
buyers’ territory. Homebuilding in the Atlantic provinces
5 P4 S1 ~9 n; x$ Ghas been relatively balanced but, while not plagued by structural
0 M$ k8 ?( e( j0 w1 n+ h0 j% T( r3 Iweakness, will be singed by the downturn nonetheless.
Québec shows signs of strain – especially given the
) g- |* o; R+ e" B, L- m, A2 Estrange accumulation of unabsorbed multiples on l’Île de
. e" p( e3 u, g. c+ w/ o' e9 dMontréal – but recent building has been relatively balanced,
6 P* v) U* z: n6 ?# J% l* @# t4 {given 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
; a' n8 |8 z. e* U5 J' Acondo market. Both in Toronto and Vancouver, historically
3 Z; c- F4 D/ Hhigh levels of apartment-style units presently under
/ H: ~3 K$ B1 ~5 Hconstruction mean that record numbers of condos will
+ k7 }) M7 C' R" Hreach completion during 2009. If absorption rates fall, as
cyclical factors would indicate, condo inventories could
  p# W3 g$ L! z! o; H: kspike 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
inter-provincial and international migration over the coming
years, which, along with improvements in affordability,
! \) F. w1 n& Wwill alleviate some of the pressure from overbuilding.
$ q9 Q+ w. ?  Y2 F9 uOVERPRICED AND OVERBUILT: CANADIAN HOUSING
/ x8 x& F; ~# H9 D4 u3 \MARKET RETURNS TO FUNDAMENTALS
Grant Bishop, Economist
416-982-8063
, E6 l% P" t% FPascal Gauthier, Economist
416-944-5730

http://www.td.com/economics/special/gb0409_housing_exec.pdf

宋兵乙